Question #9
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 4
Status: Correct
Correct Answer: A
Question
Applying the Gordon growth model to value a firm experiencing supernormal growth would result in:
Answer Choices:
A. overstating the value of the firm
B. understating the value of the firm
C. a zero value
Explanation
Applying the Gordon growth model to such a firm would result in an estimate of value
based on the assumption that the supernormal growth would continue indefinitely. This
would overstate the value of the firm.