CFA Practice Question

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CFA Practice Question

Company X is expected to pay a $5 dividend next year (year 1). The dividend will decline by 5% annually for the following three years. In Year 5, the company is expected to merge with another company which will be in its growth phase. The Year 5 after-merger dividend is expected to be $6. In Year 6 the dividend is expected to be at $5. It is then expected to growth by 4% annually thereafter. Which of the following matches DDM most appropriate to value company X?

A. Three-stage DDM.
B. H model.
C. Spreadsheet modeling.
Correct Answer: C

This company's expected growth rate does not fit into any standard model. Given the complexities and the need to assign analyst defined growth rates, it's best to use spreadsheet for calculations.

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