Question #132
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 54
Status: Unattempted
Question
Which of the following groups of statistics provides enough data to calculate an implied return for a stock using the two-stage DDM?
Answer Choices:
A. Short-term growth rate, long-term growth rate, stock price, trailing 12-month profits
B. P/E ratio, trailing 12-month profits, short-term PEG ratio, long-term PEG ratio, yield
C. Yield, stock price, historical dividend-growth rate, historical profit-growth rate
Explanation
= 6.30
(0.60) (1 + 0.05)
0.15 −0.05
To calculate an implied return using the two-stage DDM, we need the stock price, the
dividend, a short-term growth rate, and a long-term growth rate. In the correct answer, we
can derive the stock price from the P/E ratio and profits, then derive the dividend from the
price and the yield. Given the P/E ratio, we can also distill growth rates using the PEG
ratios. Admittedly, earnings-growth rates aren't the same as dividend-growth rates, but
analysts routinely use either in their models. More to the point, this is the only answer in
which we can come up with even imperfect data for all the needed variables. One choice
does not provide us with a way to find the dividend. The other option does not give us the
needed short-term and long-term growth rates.