Question #88 - Reading 20 Discounted Dividend Valuation

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

Page: 34

Status: Unattempted

Correct Answer: A

Shared Context

- Judging by the data in Table 1, the most appropriate method for valuing Flyaweight would be: A) the DDM because the firm has a history of dividend growth. B) residual income because the firm is likely to have high capital demands and negative cash flow for the foreseeable future. C) justified P/E because it is a high-growth company.

Question

With respect to their statements about the use of the GGM and the H-model:

Answer Choices:

A. only Moskowitz is correct

B. only Sharpless is correct

C. both are correct

Explanation

Moskowitz is correct that an H-model assumes a linear slowdown in growth until a constant growth rate is achieved. Sharpless is incorrect that the GGM would be an appropriate technique for valuing Flyaweight because the GGM assumes a constant rate of growth in perpetuity and Flyaweight has not yet reached a constant growth rate.

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