Question #48
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 19
Status: Correct
Correct Answer: A
Question
If the three-stage dividend discount model (DDM) results in extremely high value, the:
Answer Choices:
A. growth rate in the stable growth period is probably too high
B. transition period is too short
C. growth rate in the stable growth period is lower than that of gross national product (GNP)
Explanation
If the three-stage DDM results in an extremely high value, either the growth rate in the
stable growth period is too high or the period of growth (high plus transition) is too long.
To solve these problems, an analyst should use a growth rate closer to GNP growth and
use shorter high-growth and transition periods.