invic

The Gordon growth model is well suited for:

A) utilities.

B) telecom companies.

C) biotech firms.

---

Gordon growth model is best suited to firms that have a stable growth comparable to or lower than the nominal growth rate in the economy and have well established dividend payout policies. Utilities, with their regulated prices, stable growth and high dividends, are particularly well suited for this model.

invic

Which of the following would NOT be appropriate for the Gordon growth model?

A) Mature, slow growth automotive manufacturer.

B) High-tech start-up firm with no dividends.

C) Regulated utility company.

---

The Gordon growth model is inappropriate for a firm with supernormal growth that cannot be expected to continue. A multistage model is appropriate for such a firm.

invic

Which of the following would NOT be appropriate to value a firm with two expected growth stages? A(an):

A) Gordon growth model.

B) free cash flow model.

C) H-model.

---

The Gordon growth model would not be appropriate for a firm with two stages of growth but is useful to value a firm with steady slow growth.

invic

Applying the Gordon growth model to value a firm experiencing supernormal growth would result in:

A) a zero value.

B) understating the value of the firm.

C) overstating the value of the firm.

---

Applying the Gordon growth model to such a firm would result in an estimate of value based on the assumption that the supernormal growth would continue indefinitely. This would overstate the value of the firm.

invic

Which of the following dividend discount models (DDMs) is most suited for firms growing at a rate less than the overall growth rate in the economy, with well-established dividend payout policies?

A) Two-stage DDM.

B) Gordon growth model.

C) H-model.

---

The Gordon growth model assumes that dividends grow at a constant rate forever. It is most suited for firms growing at a rate less than the overall growth rate in the economy, with well-established dividend payout policies.

invic

Which of the following models would be most appropriate for a firm that is expected to grow at an initial rate of 10%, declining steadily to 6% over a period of five years, and to remain steady at 6% thereafter?

A) The Gordon growth model.

B) A two-stage model.

C) The H-model.

---

The H-model is the best answer, as it avoids an immediate drop to 6% like a two-stage would. The Gordon growth model would not be appropriate

invic

What is the difference between a standard two-stage growth model and the H-model?

A) The H-model assumes a terminal value, while the standard two-stage model does not.

B) The H-model assumes that earnings will dip in the middle of each stage and return to the previous rate by the period's end.

C) In the standard two-stage model, a fixed rate of growth is assumed for each stage, while the H-model assumes a linearly declining rate of growth in one stage.

---

The H-model provides an estimate of the firm’s value based on the assumption that the rate of growth will change linearly over the initial stage.

invic

Which of the following dividend discount models assumes a high growth rate during the initial stage, followed by a linear decline to a lower stable growth rate?

A) Three-stage dividend discount model.

B) Gordon growth model.

C) H model.

---

The H model assumes a high growth rate during the initial stage, followed by a linear decline to a lower stable growth rate. It also assumes that the payout ratio is constant over time.

rgonzalez

The most appropriate model for analyzing a profitable high-tech firm is the:

A) three-stage dividend discount model (DDM).

B) zero growth cash flow model.

C) H-model.

---

Most of high-tech firms grow at very high rates and are expected to grow at those rates for an initial period. These rates are expected to decline as the firm grows in size and loses its competitive advantage. Of the models provided, the three-stage DDM is most appropriate to analyze high-tech firms because of its flexibility. H-model may not be appropriate, because a linear decline from the high growth rate to the constant growth rate cannot be assumed and the dividend payout ratio is fixed.

rgonzalez

Which of the following models would be most appropriate for a firm that is expected to grow at 8% for the next three years, and at 6% thereafter?

A) A two-stage model.

B) The H-model.

C) The Gordon growth model.

---

A firm that is expected to experience two growth stages with a fixed rate of growth for each stage should be evaluated with a two-stage dividend discount model.