CFA Practice Question

There are 96 practice questions for this study session.

CFA Practice Question

Company A is in growth phase. It is expected to enjoy an abnormal growth rate in earnings per share for another three years. After that the growth rate will start to decline linearly. This phase is expected to last for two years before the return on equity stabilizes at levels that can be sustained long term. The ______ is appropriate to value this company.
A. Two-stage DDM.
B. Three-stage DDM.
C. H model.
Explanation: This company is expected to show growth rate pattern as assumed by the three-stage DDM model.

User Contributed Comments 4

User Comment
Ameer747 Why is this not H model?
DariSH Probably because H-model is 2-stage model. This case has an additional layer of abnormal growth for the first 3 years.
LoCo83 1st Stage: Abnormal growth
2nd Stage: Declining (linearly) growth
3rd Stage: ROE stabilizes

H Model is short a stage as it only accounts for two stages (an alternative two stage model)
darbyland yes H-model is a 2-stage model in which gS gradually declines toward gL during the first phase
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