Learning Outcome Statements

1. Streams of expected cash flows

a. compare dividends, free cash flow, and residual income as inputs to discounted cash flow models and identify investment situations for which each measure is suitable;

2. The dividend discount model

b. calculate and interpret the value of a common stock using the dividend discount model (DDM) for single and multiple holding periods;

p. evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.

3. The Gordon growth model

c. calculate the value of a common stock using the Gordon growth model and explain the model's underlying assumptions;

d. calculate and interpret the implied growth rate of dividends using the Gordon growth model and current stock price;

g. calculate the value of noncallable fixed-rate perpetual preferred stock;

4. The present value of growth opportunities

e. calculate and interpret the present value of growth opportunities (PVGO) and the component of the leading price-to-earnings ratio (P/E) related to PVGO;

f. calculate and interpret the justified leading and trailing P/Es using the Gordon growth model;

5. Gordon growth model and the P/E ratio

e. calculate and interpret the present value of growth opportunities (PVGO) and the component of the leading price-to-earnings ratio (P/E) related to PVGO;

f. calculate and interpret the justified leading and trailing P/Es using the Gordon growth model;

6. Strengths and limitations of the Gordon growth model

h. describe strengths and limitations of the Gordon growth model and justify its selection to value a company's common shares;

7. The growth phase, transitional phase, and maturity phase of a business

j. explain the growth phase, transitional phase, and maturity phase of a business;

8. Multistage dividend discount models

i. 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;

k. describe terminal value and explain alternative approaches to determining the terminal value in a DDM;

l. calculate and interpret the value of common shares using the two-stage DDM, the H-model, and the three-stage DDM;

n. explain the use of spreadsheet modeling to forecast dividends and to value common shares;

9. Estimating and calculating the implied expected rate of return

m. estimate a required return based on any DDM, including the Gordon growth model and the H-model;

10. Strengths and limitations of multistage DDMs

m. estimate a required return based on any DDM, including the Gordon growth model and the H-model;

11. Sustainable growth rate

o. calculate and interpret the sustainable growth rate of a company and demonstrate the use of DuPont analysis to estimate a company's sustainable growth rate;

12. Using the DuPont model to estimate the return on equity

o. calculate and interpret the sustainable growth rate of a company and demonstrate the use of DuPont analysis to estimate a company's sustainable growth rate;