CFA Practice Question

There are 96 practice questions for this study session.

CFA Practice Question

If a company is not dividend-paying, we can use ______ to define its cash flows.

I. dividend discount model
II. free cash flow model
III. residual income model
Correct Answer: II and III

DDM cannot be applied to valuation of companies that do not have established dividend policy and do not pay dividends.

User Contributed Comments 4

User Comment
loo101 residual income model helps to assess the value of a company. but is it really used to define its cash flows?
danlan2 I think only II is right.
noonah III is also right. It follows the broader definition of cash flows in the context of value appraisal of a business.
rhardin Quote from page 304 of the CFA Institute material: "Can the DDM be applied to non-dividend-paying shares? In theory it can, as is illustrated later, but in practice it generally is not." So my take away is yes, it CAN, though probably shouldn't.
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