ACCA Financial Management (F9) Certification Practice Exam

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Prepare for the ACCA Financial Management (F9) Certification Exam with engaging quizzes and interactive content. Dive deep into financial management concepts and boost your exam confidence with questions that come with detailed explanations.

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In the context of valuations, what does 'g' denote in Gordon's Growth Model?

Growth rate of dividends
Market capitalization rate
Dividend amount
Rate of return on equity

The correct answer is: Growth rate of dividends

In the context of valuations, particularly when applying Gordon's Growth Model (also known as the Dividend Discount Model for constant growth), 'g' specifically denotes the growth rate of dividends. This model is used to estimate the present value of an infinite series of future dividends that are expected to grow at a constant rate over time. The Gordon Growth Model is structured around the premise that dividends will increase at a steady rate indefinitely, and the formula essentially calculates the present value of an expected future cash flow. The incorporation of 'g' is crucial, as it reflects the anticipated growth in dividends, which is essential for investors when determining how much they are willing to pay for a stock based on its future cash flows. The accurate understanding of this growth rate is vital since it not only influences the valuation of a company but also assists in making informed investment decisions based on expected future earnings. The dividend growth rate directly impacts the estimated value of the stock, making it a central component of the model.