Reading 42: Discounted Dividend Valuation-LOS a 习题精选 identify, contrast, investment, discounted, 2011

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Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 42: Discounted Dividend Valuation

LOS a: Compare and contrast dividends, free cash flow, and residual income as alternative measures in discounted cash flow models, and identify the investment situations for which each measure is suitable.

 

 

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 (r_n). Most of the time r > r_n, since during the stable period the firm is less risky and shareholders require a lower rate of return.

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If an asset was fairly priced from an investor’s point of view, the holding period return (HPR) would be:

A) equal to the alpha returns.

B) the same as the required return.

C) lower than the required return.

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A fairly priced asset would be one that has an expected HPR just equal to the investor’s required return.

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If an investor were attempting to capture an asset’s alpha returns, the expected holding period return (HPR) would be:

A) higher than the required return.

B) lower than the required return.

C) the same as the required return.

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Alpha returns are returns in addition to the required returns, so the expected HPR would be higher than the required return.

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Which of the following dividend discount models has the limitation that a sudden decrease to the lower growth rate in the second stage may NOT be realistic?

A) Gordon growth model.

B) H model.

C) Two-stage dividend discount model.

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The two-stage DDM has the limitation that a sudden decrease to the lower growth rate in the second stage may not be realistic. Further, the model has the difficulty in trying to estimate the length of the high-growth stage.

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Free cash flow to equity models (FCFE) are most appropriate when estimating the value of the firm:

A) to equity holders.

B) to creditors of the firm.

C) only for non-dividend paying firms.

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FCFE models attempt to estimate the value of the firm to equity holders. The models take in to account future cash flows due to others, including debt and taxes, and amounts required for reinvestment to continue the firm’s operations.

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If the three-stage dividend discount model (DDM) results in extremely high value, the:

A) growth rate in the stable growth period is lower than that of gross national product (GNP).

B) growth rate in the stable growth period is probably too high.

C) transition period is too short.

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If the three-stage DDM results in an extremely high value, either the growth rate in the stable growth period is too high or the period of growth (high plus transition) is too long. To solve these problems, an analyst should use a growth rate closer to GNP growth and use shorter high-growth and transition periods.

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The H-model is more flexible than the two-stage dividend discount model (DDM) because:

A) initial high growth rate declines linearly to the level of stable growth rate.

B) payout ratio changes to adjust the changes in growth estimates.

C) terminal value is not sensitive to the estimates of growth rates.

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A sudden decline in high growth rate in two-stage DDM may not be realistic. This problem is solved in the H-model, as the initial high growth rate is not constant, but declines linearly over time to reach the stable-growth rate.

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Multi-stage dividend discount models can be used to estimate the value of shares:

A) only when the growth rate exceeds the required rate of return.

B) under an almost infinite variety of scenarios.

C) only under a limited number of scenarios.

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Multi-stage dividend discount models are very flexible, allowing their use with an almost infinite variety of growth scenarios.

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The H model will NOT be very useful when:

A) a firm has low or no dividends currently.

B) a firm has a constant payout policy.

C) a firm is growing rapidly.

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The H model is useful for firms that are growing rapidly but the growth is expected to decline gradually over time as the firm gets larger and faces increased competition. The assumption of constant payout ratio makes the model inappropriate for firms that have low or no dividend currently.

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One of the limitations of the dividend discount models (DDMs) is that:

A) they are conceptually difficult.

B) they are very sensitive to growth and required return assumptions.

C) given the inputs, they are not very precise in their valuations.

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DDMs are very sensitive to the growth and required return assumptions, and it is often wise to interpret the value as a range rather than a precise dollar amount.