Question #36
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 16
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Analyst Kelvin Strong is arguing with fellow analyst Martha Hatchett. Strong insists that the dividend discount model can be used to calculate the required return for a stock, though only if the growth rate remains constant. Hatchett maintains that while such models are useful for calculating the value of a stock, they should not be used to calculate required returns. Who is CORRECT? Strong Hatchett
Answer Choices:
A. Incorrect Incorrect
B. Correct Incorrect
C. Incorrect Correct
Explanation
Dividend discount models can be used to calculate required returns, assuming you have
the stock price, dividends, and dividend-growth rates, so Hatchett is wrong. Strong is right
about the fact that a DDM can calculate required returns, but wrong about the growth rate
assumption. Multistage dividend discount models can account for expected changes in the
growth rate.