"An approach which applies a theoretical price to a company’s shares by discounting the company’s expected future cash flow into infinity." This statement is describing the:

"An approach which applies a theoretical price to a company’s shares by discounting the company’s expected future cash flow into infinity." This statement is describing the:

A. Net asset value

B. Market value added

C. Dividend valuation model

D. Economic value added

View Answer

Answer: C

Explanation:

Dividend Valuation Model (DVM)

The DVM values a company’s shares by calculating the present value of future expected dividends, assuming dividends grow perpetually at a constant rate.

Why the Answer is C

The model explicitly relies ondiscounting future cash flows (dividends)to determine the theoretical share price.

Why Other Options are Incorrect

A. Net asset value: Focuses on book value, not cash flows.

B. Market value added: Measures value creation over invested capital, unrelated to theoretical share pricing.

D. Economic value added: Measures performance based on excess returns, not share valuation.

ICWIM Study Guide, Chapter on Equity Valuation: Explains the DVM and its mechanics.

Valuation Literature: Highlights DVM’s use in share pricing.