Is it mandatory to install AD and DNS on the same server?

The answer is yes, if it is the first DC in a forest. In that case DNS will be installed by default during the AD promotion process. This is done because DNS is an integral for the proper functioning of AD. Without a properly configured DNS, the AD infrastructure would not  work

ref: http://technet.microsoft.com/en-us/library/cc759550(v=ws.10).aspx

Coming back to our question, do you need to install DNS in every AD in your domain ? The answer is no. If a DNS server already exists in a domain, you will get an option to choose whether  you want to install DNS in the Ad server. It will also list the available DNS servers in the domain . If you choose not to install a DNS, then that is perfectly fine.The AD will use one of the available DNS servers. However just make sure that the DNS settings in your network card is configured correctly to point to one of those available DNS servers

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