HuskyGrad2010

Which of the following is least likely a limitation of the two-stage dividend discount model (DDM)?

A) use of one required rate of return for both stages might overstate the value.

B) most of the value is due to the terminal value, which is very sensitive to the estimates of stable growth.

C) the length of the high-growth stage is difficult to measure.

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The two-stage DDM uses a different required rate of return (cost of equity) for high-growth period (r) and steady state (rn). Most of the time r > rn, since during the stable period the firm is less risky and shareholders require a lower rate of return

HuskyGrad2010

Historical information used to determine the long-term average returns from equity markets may suffer from survivorship bias, resulting in:

A) deflating the mean return.

B) unpredictable results.

C) inflating the mean return.

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Survivorship bias refers to the weeding out of underperforming firms, resulting in an inflated value for the mean return.