Question #5
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 2
Status: Correct
Correct Answer: B
Question
The most appropriate model for analyzing a profitable high-tech firm is the:
Answer Choices:
A. H-model
B. zero growth cash flow model
C. three-stage dividend discount model (DDM)
Explanation
Most of high-tech firms grow at very high rates and are expected to grow at those rates for
an initial period. These rates are expected to decline as the firm grows in size and loses its
competitive advantage. Of the models provided, the three-stage DDM is most appropriate
to analyze high-tech firms because of its flexibility. H-model may not be appropriate,
because a linear decline from the high growth rate to the constant growth rate cannot be
assumed and the dividend payout ratio is fixed.