Skip to content

CFA Level I · CFA Level I Exam · Discounted Cash Flow (DCF) and Growth Models

In a two-stage DDM where the required return exceeds both growth rates and the high growth rate exceeds the stable growth rate, extending the high-growth period while holding all other inputs constant will most likely:

Extending the high-growth period will most likely increase intrinsic value. Dividends compound at the faster rate for longer, producing a larger dividend base for the terminal value, while the required return and stable growth rate stay the same. Therefore the present value of expected dividends rises.

  1. AReduce the intrinsic value
  2. BIncrease the intrinsic valueCorrect
  3. CLeave the intrinsic value unchanged

Explanation

A longer period at the higher growth rate means later dividends are larger than they would be under stable growth. Since the required return is unchanged and the terminal value is based on a higher dividend base, the present value of the stream rises. Value falls only if the high growth rate were below the stable rate.

Did you get it right without looking?

One question tells you little. A timed set on Discounted Cash Flow (DCF) and Growth Models shows your real accuracy, how long you take and where you lose marks.

Practise Discounted Cash Flow (DCF) and Growth ModelsFree diagnostic mock

More Discounted Cash Flow (DCF) and Growth Models questions