- CFA Exams
- CFA Level I Exam
- Study Session 10. Equity Valuation (2)
- Reading 27. Discounted Dividend Valuation
- Subject 1. Streams of expected cash flows
CFA Practice Question
An investor is valuing several companies in the market. He does not take a control perspective unless specified.
Company B: low growth rate, large dividend payout ratio, steady and stable dividend policy.
Company C: regular dividend-paying. The investor is considering acquiring a controlling stake.
Company D: regular dividend-paying. The dividend policy does not bear a consistent relationship to the company's earnings.
Company A: in growth phase, highly profitable, not paying any dividends now.
Company B: low growth rate, large dividend payout ratio, steady and stable dividend policy.
Company C: regular dividend-paying. The investor is considering acquiring a controlling stake.
Company D: regular dividend-paying. The dividend policy does not bear a consistent relationship to the company's earnings.
DDM is not appropriate to value:
A. Company A, B and C.
B. Company B, C and D.
C. Company A, C and D.
Explanation: DDM is not appropriate because company A does not pay dividend, the investor wants to take a control perspective in C, and there is no reliable relationship between earnings and dividends for company D.
User Contributed Comments 2
| User | Comment |
|---|---|
| ThePessimist | FCFE is more appropriate for C, since investor could change the dividend policy. |
| yxten1 | I thought answer A is incorrect because the company is in growth stage (hence "g" is a very sensitive input in DDM model) and not due to not paying dividend. Dividend is cummulative hence even if the company is not paying it now it has to be paid some time in future. |