Final answer:
The present value of the dividend is useful for valuing non-publicly traded firms by discounting expected future benefits back to their present value. The right interest rate is essential to calculate present discounted value for stocks and bonds, affecting an investor's willingness to pay. Option D is the correct answer.
Step-by-step explanation:
The use of the present value of the dividend is especially helpful in valuing firms that are not publicly traded. This valuation method takes into account the stream of benefits to be received in the future, which includes potential capital gains and dividends that might be paid out by the company. When applying this method, choosing the appropriate interest rate is crucial as it affects the present discounted value (PDV) of future payments, making it a key factor in determining what an investor is willing to pay for a stock or bond in the present.
In the context of stocks, if a company is expected to disband in the future and it is forecasted to make profits that will be distributed as dividends, the present value of those dividends is calculated by discounting them to their present value at a chosen interest rate. For a bond, the future payments that the bond will make, such as interest payments and the repayment of the face value, are discounted to present value based on the current interest rates.