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Basic Question 0 of 7
If a company is not dividend-paying, we can use ______ to define its cash flows.
II. free cash flow model
III. residual income model
I. dividend discount model
II. free cash flow model
III. residual income model
User Contributed Comments 4
| User | Comment |
|---|---|
| loo101 | residual income model helps to assess the value of a company. but is it really used to define its cash flows? |
| danlan2 | I think only II is right. |
| noonah | III is also right. It follows the broader definition of cash flows in the context of value appraisal of a business. |
| rhardin | Quote from page 304 of the CFA Institute material: "Can the DDM be applied to non-dividend-paying shares? In theory it can, as is illustrated later, but in practice it generally is not." So my take away is yes, it CAN, though probably shouldn't. |
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Colin Sampaleanu
Learning Outcome Statements
explain the assumptions and justify the selection of the two-stage DDM, the H-model, the three-stage DDM, or spreadsheet modeling to value a company's common shares;
describe terminal value and explain alternative approaches to determining the terminal value in a DDM;
calculate and interpret the value of common shares using the two-stage DDM, the H-model, and the three-stage DDM;
explain the use of spreadsheet modeling to forecast dividends and to value common shares;
evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.
CFA® 2025 Level II Curriculum, Volume 3, Module 21.