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PRMIA Exam 8006 Topic 5 Question 14 Discussion
Actual exam question for
PRMIA's
Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition exam
Question #: 14
Topic #: 5
[All Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Questions]
Topic #: 5
According to the dividend discount model, if d be the dividend per share in perpetuity of a company and g its expected growth rate, what would the share price of the company be. 'r' is the discount rate.
A.
B.
C.
D.
Suggested Answer:
A
According to the dividend discount model, the spot share prices represent the present value of all the future cash flows from the stock. If held till perpetuity, this becomes an annuity equal to the dividend, growing at its expected growth rate. Therefore Choice 'a' is the correct answer. Choice 'c' would represent the total market cap, and not the value per share that the question asks.
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