CFA Practice Question

There are 96 practice questions for this study session.

CFA Practice Question

A food industry analyst is examining Hormel Foods. From the most recent 10 years of data he has found that the company's dividends have been very stable and constant at $1.00 a share throughout the entire 10-year period, but its earnings have been very volatile. The analyst is not taking any control perspective in his research. Applying a DDM to the company is:
A. appropriate as it is dividend-paying and the analyst has a long dividend record to analyze.
B. appropriate as he is not taking any control perspective.
C. not appropriate as its dividends don't bear an understandable and consistent relationship to its earnings.
Explanation: In this case dividends don not adjust to reflect changes in earnings, applying a DDM to the company is not appropriate.

User Contributed Comments 3

User Comment
danlan2 DDM is for constant dividend rate and not for constant dividend value.
harrybay But DDM is much more easy to implement if dividend is constant no?
darbyland I chose B due to non-control perpspective. i guess dividend policy is more important in consideration
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