CFA Level I · CFA Level I Exam · Discounted Cash Flow (DCF) and Growth Models
Which of the following situations is the Gordon growth model most likely to be least appropriate for valuing?
The model is least appropriate for a rapidly growing start-up that pays no dividends. The Gordon growth model needs dividends growing at a stable constant rate below the required return, which fits mature, steady payers but not firms with changing growth and no dividend history.
- AA mature utility with stable, predictable dividends
- BA start-up technology firm paying no dividends and growing rapidlyCorrect
- CA consumer staples company with a long record of steady dividend growth
Explanation
The model assumes dividends grow at a constant rate forever below the required return. It suits mature, stable dividend payers. A rapidly growing non-dividend-paying firm has no stable growth pattern, so a multistage approach would be needed instead.
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.
More Discounted Cash Flow (DCF) and Growth Models questions
- An analyst values a mature, profitable utility that pays a stable dividend payout ratio and is expected to grow at a constant rate indefinit…
- An analyst estimates a stock's sustainable growth rate using a return on equity of 15% and a dividend payout ratio of 40%. The sustainable g…
- Compared with an FCFF valuation, an FCFE valuation is most likely to be preferred when the analyst is valuing a company that has:
- A firm has EBIT of 500, a tax rate of 30%, depreciation of 80, fixed capital investment of 150, and an increase in working capital of 20, al…
- An investor plans to hold a share for one year. She expects a dividend of $3.00 at year-end and a selling price of $53.00 at that time. The …
- An analyst values a company using a free cash flow to the firm (FCFF) model. The present value of the FCFF is discounted at the rate that mo…