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Basic Question 2 of 4
The drawbacks of dividend yield approach are:
II. Dividends are only part of the total returns.
III. Dividends are less stable than free cash flows as management can decide a company's dividend policy.
IV. The argument about the relative safety of dividends presupposes that the market prices reflect in a biased way differences in the relative risk of the components of return.
I. Dividends paid now displace earnings in all future periods.
II. Dividends are only part of the total returns.
III. Dividends are less stable than free cash flows as management can decide a company's dividend policy.
IV. The argument about the relative safety of dividends presupposes that the market prices reflect in a biased way differences in the relative risk of the components of return.
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan2 | Is III correct? |
| vladas | III is not correct. The statement is even inconsistent. Company´s div policy can maintain dividends stable as opposed to FCF. |
| HenryQ | Can anyone explain IV? |
| prabhur08 | Regarding IV: The components of returns on a stock are: 1) Dividend 2) Capital Gains Efficient market theory says that dividend policy does not impact the value of the stock. However by using dividend yield to compare stocks, the underlying assumption is that investors value dividends differently from capital gains. |
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Learning Outcome Statements
calculate and interpret alternative price multiples and dividend yield;
calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;
explain and justify the use of earnings yield (E/P);
describe fundamental factors that influence alternative price multiples and dividend yield;
calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;
calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;
evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;
calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;
calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;
explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;
calculate and interpret EV multiples and evaluate the use of EV/EBITDA;
CFA® 2025 Level II Curriculum, Volume 4, Module 23.