土豆妮

The H model will NOT be very useful when:

A) a firm has a constant payout policy.

B) a firm is growing rapidly.

C) a firm has low or no dividends currently.

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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.

土豆妮

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

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

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

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.

土豆妮

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.

土豆妮

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) Two-stage dividend discount model.

B) Gordon growth model.

C) H 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.

土豆妮

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

A) to creditors of the firm.

B) to equity holders.

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.

土豆妮

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.

土豆妮

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

A) lower than the required return.

B) higher 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.