Skip to content

CA Final · Advanced Financial Management · Security Analysis

In the constant growth dividend discount model, which change would, other things equal, reduce the intrinsic value of a share?

A rise in the risk-free rate that increases the required return reduces intrinsic value, because the required return sits in the denominator of D1 divided by (ke minus g). Lower required return, higher growth or higher next dividend each raise the value.

  1. AA fall in the required rate of return
  2. BA rise in the expected growth rate of dividends
  3. CA rise in the risk-free rate leading to a higher required returnCorrect
  4. DA rise in next year's expected dividend

Explanation

Value = D1/(ke - g). A higher ke widens the denominator and lowers value. The other changes raise value.

Did you get it right without looking?

One question tells you little. A timed set on Security Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Security AnalysisFree diagnostic mock

More Security Analysis questions