CFA Level I · CFA Level I Exam · Discounted Cash Flow (DCF) and Growth Models
An analyst values a mature, profitable utility that pays a stable dividend payout ratio and is expected to grow at a constant rate indefinitely. Which model is most appropriate for estimating its intrinsic value?
The Gordon growth model is most appropriate. A mature utility with a stable payout ratio and a constant, perpetual growth rate matches the model's assumptions, whereas multi-stage or H-model approaches are designed for firms whose growth is expected to change over time.
- AGordon growth modelCorrect
- BThree-stage dividend discount model
- CH-model with a long fade period
Explanation
A mature firm with stable payout and constant growth fits the Gordon (constant growth) model. Multi-stage models are meant for firms whose growth rate changes over time, so they add complexity without need here.
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