LOS p: Illustrate the use of spreadsheet modeling to forecast dividends and value common shares.

Q1. Financial models such as the DDM represent a cornerstone of equity valuation from an academic standpoint. But in the real life, many analysts do not use the DDM. The least likely reason for this is:

A)   modern research has shown that many of the old standbys do not work.

B)   some of the assumptions required are impractical.

C)   the model lacks the flexibility required to model values in the real world.

Q2. Relative to traditional financial models like the dividend discount model, the biggest advantage of spreadsheet modeling is:

A)   accuracy of computations.

B)   quantity of computations.

C)   simplicity of computations.

Q3. Which of the following actions will be least helpful for an analyst attempting to improve the predictive power of his scenario analysis?

A)   Acquiring more precise inputs.

B)   Using a spreadsheet rather than a calculator.

C)   Limiting deviations from the core model.

LOS p: Illustrate the use of spreadsheet modeling to forecast dividends and value common shares. fficeffice" />

Q1. Financial models such as the DDM represent a cornerstone of equity valuation from an academic standpoint. But in the real life, many analysts do not use the DDM. The least likely reason for this is:

A)   modern research has shown that many of the old standbys do not work.

B)   some of the assumptions required are impractical.

C)   the model lacks the flexibility required to model values in the real world.

Correct answer is A)

The DDM requires assumptions that many analysts find impractical. In addition, the model lacks the flexibility to adapt to changing circumstances. Both of these problems can be overcome, to a large extent, by using spreadsheet modeling to forecast cash flows and other variables.

Q2. Relative to traditional financial models like the dividend discount model, the biggest advantage of spreadsheet modeling is:

A)   accuracy of computations.

B)   quantity of computations.

C)   simplicity of computations.

Correct answer is B)

Computations are no simpler or more complicated on a spreadsheet as opposed to a calculator. Accuracy tends to be improved with the use of a spreadsheet, because you don’t have to punch numbers into a calculator at any stage. However, someone truly concerned with accuracy can do a fine job with a calculator. The spreadsheet stands out when it comes to quantity. Analysts can program many permutations and scenarios into a spreadsheet, using minutes to do what would take hours or even days or weeks with a calculator.

Q3. Which of the following actions will be least helpful for an analyst attempting to improve the predictive power of his scenario analysis?

A)   Acquiring more precise inputs.

B)   Using a spreadsheet rather than a calculator.

C)   Limiting deviations from the core model.

Correct answer is C)

The whole point of scenario analysis is the flexibility to modify the inputs to see how changes in one factor affect others. In order to perform scenario analysis, you must deviate from the core model. Increased precision on the inputs will increase the predictive power of almost any model. Spreadsheets reduce the likelihood of computational inaccuracies and allow analysts to more easily modify models to reflect many scenarios.

thanks a lot