ACCA Financial Management (F9) Certification Practice Exam

In the context of dividends, what do 'ke' and 'D' represent?

1. Rate of return and market price

2. Shareholder's required rate and constant annual dividend

3. Interest rate and growth rate

4. Cost of goods sold and average inventory

The correct answer is: Shareholder's required rate and constant annual dividend

In the context of dividends, 'ke' represents the shareholder's required rate of return, which reflects the minimum return that investors expect for investing in a company's stock. This rate is influenced by factors such as the risk associated with the stock and the returns available in the market from comparable investments. 'D,' on the other hand, denotes the constant annual dividend that a company pays to its shareholders. This is a critical component in dividend valuation models, particularly in the Gordon Growth Model, which assumes that dividends will grow at a certain rate over time. This relationship between 'ke' and 'D' is essential for investors when evaluating the attractiveness of a stock. The required return ('ke') allows investors to assess whether the expected returns from dividends meet their investment criteria, while 'D' provides a tangible figure for determining the stock's value and the future cash flows investors can expect.