Question #79 - Reading 20 Discounted Dividend Valuation

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

Page: 30

Status: Unattempted

Correct Answer: B

Shared Context

- Assuming a beta of 1.12, if UC's growth rate is 10% initially and is expected to decline steadily to a stable rate of 5% over the next three years, what is the price of UC stock? A) $47.82. B) $46.61. C) $47.67.

Question

The discounted dividend approach that we have used to value UC Inc. is most appropriate for valuing dividend-paying stocks in which:

Answer Choices:

A. free cash flow is negative

B. the investor takes a minority ownership perspective

C. dividends differ substantially from FCFE

Explanation

The discounted dividend approach is most appropriate for valuing dividend-paying stocks in a company that has an rational dividend policy with a clear relationship to the company's profitability, and where the investor takes a minority ownership (non-control) perspective. A free cash flow approach may be appropriate when a company's dividends differ significantly from FCFE. The residual income approach is most useful when a company's free cash flow is negative.

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