Stock valuation models are dependent upon which of the following factors?

• A. Future expected cash flows and the required rate of return
• B. The company's tax rate exclusively
• C. Historical cost of inventory only
• D. The number of employees in the company

Answer: (A)

Verified step by step guidance

1. Understand the concept of stock valuation models: Stock valuation models are used to estimate the intrinsic value of a company's stock based on various financial factors. These models typically rely on future expected cash flows and the required rate of return as key inputs.
2. Analyze the options provided: Evaluate each option to determine its relevance to stock valuation models. For example, the company's tax rate exclusively, historical cost of inventory only, and the number of employees in the company are not directly related to stock valuation models.
3. Focus on future expected cash flows: Future expected cash flows represent the anticipated financial benefits that the stockholder will receive, such as dividends or capital gains. These are essential for determining the stock's value.
4. Consider the required rate of return: The required rate of return is the minimum return an investor expects to earn from an investment, considering the risk involved. It is a critical factor in discounting future cash flows to their present value.
5. Conclude that stock valuation models depend on future expected cash flows and the required rate of return: This combination is fundamental to estimating the intrinsic value of a stock, as it reflects both the potential earnings and the investor's expectations.