Which of the following statements concerning security valuation is least accurate? The: A) required rate of return for the dividend discount model is influenced by inflation. B) dividend discount model assumes that the required rate of return is greater than the growth rate of the company’s dividend. C) real risk-free rate is the nominal risk-free rate times the expected inflation rate.
C
haha, my dog’s name is dave.
Nominal RFR = (1 + Expected Inflation) x (1 + Real RFR)
I should specify. I immediately identified C as being false, but doesn’t the DDM start giving negative values if k
Yep.
So it doesn’t assume it’s greater, it just assumes it’s greater in order to yield a usable result?
Correct. They won’t give you a question where g is greater than k. That would be a total mind $%@&. The assumptions regarding DDM remain valid so long as k>g.
Ha… you know, I think I just had the ‘least accurate’ mixed up… jeez. Long day.
Ans is C
I was just working on a bond problem and my calculator in BGN MODE!! I spent 10 minutes wondering wtf was going on. Note to self, always return calc to end mode.
Not A because of process of elimination, and i’m far to lazy to figure out/remember the real reason why. Not B because: k