Which of the following statements best describes the concept used to value shares?
A)The value of an infinite stream of dividends discounted by the current short-term interest rate assuming a company has an infinite life.
B)Market price can be expressed as the present value of an infinite stream of dividends.
C)The present value of the dividend stream and expected capital gain must be calculated separately and then added together.
D)Market price can be expressed as the present value of an infinite stream of dividends assuming a company has an infinite life.

Question

Quizplus · Accepted Answer

This statement best describes the discounted cash flow method used to value shares. It assumes that a company has an infinite life and values the market price based on the present value of an infinite stream of dividends. Choice A is incorrect as it only considers the short-term interest rate and assumes a company has an infinite life, while choice B is similar to the correct answer but does not mention the assumption of infinite life. Choice C is also incorrect as the present value of total anticipated returns (dividend stream and expected capital gain) is used to value shares, rather than separate calculations.

Which of the Following Statements Best Describes the Concept Used