Reading 46: Discounted Dividend Valuation - LOS s ～ Q6- limitation, following, discount, decrease, growth

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6.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)   H model.

B)   Two-stage dividend discount model.

C)   Gordon growth model.

D)   Three-stage dividend discount model.

7.The H model is more flexible than the two-stage DDM because:

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

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

C)   initial low growth rate increases linearly to the level of stable growth rate.

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

8.All of the following are limitations of the two-stage dividend discount model (DDM) EXCEPT:

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

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

C)   a sudden decrease in growth rate may not be realistic.

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

9.When using the two-stage dividend discount model (DDM), an extremely low value might result when the:

A)   beta in the stable growth period is too low.

B)   stable period payout ratio is too low.

C)   growth rate in the stable growth period is too high.

D)   stable period payout ratio is too high.

10.Which of the following is NOT a potential problem associated with the three-stage DDM? The:

A)   beta in the stable period is too high, resulting in an extremely low stock value.

B)   growth rate in the stable growth period is too high, resulting in extremely high stock value.

C)   high-growth and transitional periods are too long, resulting in an extremely high stock value.

D)   stable period payout ratio may be too high resulting in an extremely low value.

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答案和详解如下：

6.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)   H model.

B)   Two-stage dividend discount model.

C)   Gordon growth model.

D)   Three-stage dividend discount model.

The correct answer was B)

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.

7.The H model is more flexible than the two-stage DDM because:

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

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

C)   initial low growth rate increases linearly to the level of stable growth rate.

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

The correct answer was D)

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.

8.All of the following are limitations of the two-stage dividend discount model (DDM) EXCEPT:

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

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

C)   a sudden decrease in growth rate may not be realistic.

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

The correct answer was A)

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 is greater than r_n, since during the stable period the firm is less risky and shareholders require a lower rate of return.

9.When using the two-stage dividend discount model (DDM), an extremely low value might result when the:

A)   beta in the stable growth period is too low.

B)   stable period payout ratio is too low.

C)   growth rate in the stable growth period is too high.

D)   stable period payout ratio is too high.

The correct answer was B)

If an analyst gets an extremely low value using two-stage DDM, it is most likely that the stable period payout ratio is too low or the beta in the stable growth period is too high.

10.Which of the following is NOT a potential problem associated with the three-stage DDM? The:

A)   beta in the stable period is too high, resulting in an extremely low stock value.

B)   growth rate in the stable growth period is too high, resulting in extremely high stock value.

C)   high-growth and transitional periods are too long, resulting in an extremely high stock value.

D)   stable period payout ratio may be too high resulting in an extremely low value.

The correct answer was D)    

If the stable period payout ratio is too low it may result in an extremely low value because the terminal value will be lower due to the smaller dividends being paid out.