Question #30
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 14
Status: Correct
Correct Answer: A
Question
If the risk-free rate is 6%, the equity premium of the chosen index is 4%, and the asset's beta is 0.8, what is the discount rate to be used in applying the dividend discount model?
Answer Choices:
A. 10.80%
B. 7.80%
C. 9.20%
Explanation
The discount rate = risk-free rate + beta (return expected on equity market less the risk-
free rate). Here, discount rate = 0.06 + (0.8 × 0.04) = 0.092, or 9.2%.