The discount rate in equity valuation is composed entirely of:
A) the dividends paid and the capital gains yield.
B) the dividend yield and the growth rate.
C) the dividends paid and the growth rate.
D) the capital gains earned and the growth rate.
E) the capital gains earned and the dividends paid.

Question

Quizplus · Accepted Answer

The discount rate in equity valuation is composed of the dividend yield and the growth rate. The dividend yield represents the annual dividend payments relative to the current stock price, while the growth rate represents the expected rate of growth in earnings and dividends over time. Together, these factors determine the expected return an investor can earn by holding the stock, which is used to discount future cash flows in determining the stock's present value. The other answer choices either include factors that are not part of the discount rate (such as capital gains earned), or omit one of the essential components (such as dividends paid).

The Discount Rate in Equity Valuation Is Composed Entirely Of