CFA® Level I question of the day
12 October 2026 · Equity Investments
When is free cash flow to equity preferred to a dividend discount model?
Show the answer and explanation
Answer: B. When the company pays no dividend or pays one unrelated to its capacity
The dividend model requires a dividend that reflects economics. Where policy and capacity diverge, cash flow measures what shareholders could receive.
- A. When the company's dividend is stable and predictable — That is where the dividend model works best — a dividend that tracks the firm's capacity is exactly what it needs.
- C. When the company has no debt — Debt affects how the two free cash flow measures differ from each other, not whether either beats the dividend model.
Get a new question every day with spaced review, so the ones you miss come back before you forget them.
Take the free diagnostic →More on Equity Investments
Notes, formulas and a worked question for every learning outcome are on the Equity Investments page, with the whole CFA Level I syllabus alongside.