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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What formula is used to determine the market value of shares when considering dividends?

MV = D * ke
MV = D / ke
MV = ke / D
MV = D + ke

The correct answer is: MV = D / ke

The correct understanding of how to determine the market value of shares when dividends are considered can be derived from the dividend discount model (DDM). According to this model, the market value of a share is calculated by discounting expected future dividends back to their present value using the required rate of return (denoted as ke). In this case, the formula MV = D / ke effectively illustrates this relationship. Here, MV represents the market value of the share, D symbolizes the expected dividends per share, and ke stands for the cost of equity or required rate of return. This formula suggests that the market value of a share is directly proportional to the expected dividends and inversely proportional to the cost of equity. In other words, as the expected dividends increase, the market value of the share also increases, whereas a higher required rate of return reduces the present value of those future dividends, thereby lowering the market value. This model is a foundational concept in equity valuation, reflecting the principle that investors are willing to pay for shares based on their expected future cash flows, discounted to present value. Understanding this reasoning is crucial for financial management, especially when evaluating investments and conducting value assessments for equity securities.