When discounting dividends you should use:
A)the weighted average cost of capital.
B)the after-tax weighted average cost of capital.
C)the equity cost of capital.
D)the before-tax cost of debt.

Question

Quizplus · Accepted Answer

When discounting dividends, it is best to use the equity cost of capital. This is because dividends are paid out only to equity shareholders and not to debt holders. Therefore, the equity cost of capital represents the required rate of return for equity investors and is the most appropriate discount rate to use when evaluating the present value of future dividend payments. The other options (A, B, D) are not as appropriate because they take into account the cost of debt financing or the overall cost of capital, which is not relevant for discounting dividends.

When Discounting Dividends You Should Use