Question #72 - Reading 20 Discounted Dividend Valuation

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

Page: 28

Status: Unattempted

Shared Context

- Which of the following statements is least accurate? The two-stage DDM is most suited for analyzing firms that: A) are in an industry with low barriers to entry. B) are expected to grow at a normalized rate after a fixed period of time. C) own patents for a very profitable product.

Question

What is the implied required rate of return for Reality Productions?

Answer Choices:

A. 12.50%

B. 11.00%

C. 11.75%

Explanation

The H-model applies to firms where the dividend growth rate is expected to decline linearly over the high-growth stage until it reaches its long-run average growth rate. This most closely matches the anticipated pattern of growth for Reality Productions. The H-model can be rewritten in terms of r and used to solve for r given the other model inputs: r = D0 / P0 × [(1 + gL) × [H × (gS - gL)] + gL Here, r = 1.5 / 30 × [(1 + 0.05) + [(6.0 / 2) × (0.10 − 0.05)] + 0.05 = 0.11

Actions

Practice Flashcards