Question

The proper discount rate when using the dividend discount valuation model is the:

A) Weighted average cost of capital

B) Cost of equity capital

C) Cost of debt capital

D) Average borrowing rate

Answer 1

Answer:

B) Cost of equity capital

Explanation:

Dividend discount model is used to find the Price of a given stock by calculating the present value of expected future dividends.

The dividend discount formula for finding price(assuming zero growth rate);

P0 = D1/r

The rate; r is the discount rate which is the cost of equity since dividends are paid on equity capital.

Weighted average cost of capital (WACC) is used to discount free cashflows of potential projects.