Certified Valuation Analyst (CVA) Practice Exam

Which method requires annual dividend payments to ascertain company value?

1. Market approach

2. Cost approach

3. Income approach

4. Dividend paying capacity method

The correct answer is: Dividend paying capacity method

The correct answer is indeed the method that specifically relies on annual dividend payments to determine a company's value. This method focuses on the cash flows that are returned to shareholders in the form of dividends, making it particularly relevant for companies that consistently distribute profits to their investors rather than reinvesting them back into the business. In the context of valuing a company, the dividend-paying capacity method assesses the present value of expected future dividends. This valuation technique is grounded in the premise that dividends are a tangible return on investment, directly reflecting the company’s performance and profitability. As such, it allows potential investors to evaluate the sustainability and growth of these dividends over time. The other methods mentioned do not specifically hinge on annual dividend payments. For instance, the market approach compares the company to similar entities in the same sector to gauge value based on market metrics, while the cost approach evaluates the value based on the costs to recreate or replace the asset. The income approach estimates value based on the present value of expected future cash flows, but it is broader and can encompass multiple forms of income, not limited to dividends. Hence, the approach utilizing dividends is distinct and focused on shareholder returns.