When deriving the equity value of a firm,an analyst forecasts the real dividends expected to be paid in the future.In this case,which discount rate should be used?
A) The nominal rate of return
B) The real rate of return
C) The risk-free rate of return
D) The risk adjusted rate of return

Question

Quizplus · Accepted Answer

When forecasting real dividends, it is appropriate to use the real rate of return as the discount rate. This is because the real rate of return accounts for changes in inflation, which can affect the real value of the dividends. The nominal rate of return includes an inflation component, which may already be included in the forecasted dividends, leading to double counting if used as the discount rate. The risk-free rate of return and the risk-adjusted rate of return are not relevant in this scenario, as they are not directly related to the forecasted dividends.

When Deriving the Equity Value of a Firm,an Analyst Forecasts