Question #16
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 6
Status: Correct
Correct Answer: B
Question
The H-model is more flexible than the two-stage dividend discount model (DDM) because:
Answer Choices:
A. terminal value is not sensitive to the estimates of growth rates
B. initial high growth rate declines linearly to the level of stable growth rate
Explanation
A sudden decline in high growth rate in two-stage DDM may not be realistic. This problem
is solved in the H-model, as the initial high growth rate is not constant, but declines
linearly over time to reach the stable-growth rate.