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ACCA Applied Skills · Financial Management · Nature and purpose of the valuation of business and financial assets

Which of the following is an assumption of the dividend valuation model (without growth) when used to value a share?

The model assumes the share price equals the present value of all expected future dividends, discounted at the shareholders' required rate of return. It is not based on net asset values, and it requires dividends to be paid rather than fully retained.

  1. AThe share price equals the present value of expected future dividends discounted at the shareholders' required returnCorrect
  2. BDividends are expected to fall at a constant rate each year
  3. CShare value depends mainly on the company's net asset value
  4. DEarnings are always fully retained and no dividends are paid

Explanation

The dividend valuation model states that a share's value is the present value of all future dividends, discounted at the shareholders' required return (cost of equity). Net asset value is a different valuation basis. The model relies on dividends being paid, so full retention contradicts it.

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