Concept explainers
Videos
To describe: The circumstances in which the
Introduction:
Dividend discount model: DDM, in short, is one of the firm’s valuation method. It is found to be similar to discounted cash flow valuation methods. DDM mainly focuses on dividends. The stock is computed on the basis of dividends which are predicted in advance and then these dividends are discounted back to know their
Answer to Problem 1PS
The stability of
Explanation of Solution
The valuation of the firm in terms of success, progress, and financial stability is a must and has to be done by every company. There are many methods to value a firm. The popular valuation methods are dividend discount model and free cash flow models. Both of these models deal with discounting of future cash flows at a required
Even though both the methods mentioned above are very useful in the valuation of a firm, there are many circumstances in which the dividend discount model is preferred more than the free cash flow model. Let us list some of the circumstances:
- ☐ Stability of cash flows: When we consider the firm’s stability in respect of cash flows sometimes valuation of the firm may not be easy. But when the dividend discount model is used for calculation, the
☐ Reliability: Reliability is one of the main aspects which attract investors. Even though there are many ups and downs in the firm, a firm pays dividends to its investors based on the cash availability of the firm. This is checked every year and only then it is announced that certain dividends will be issued to the investors. Therefore, the income in the form of dividend is certain and no false promises are made to the investors unnecessarily.
☐Applicability: The need to check a firm’s growth rate and the market capitalization rate is a must. DDM is applicable to those firms whose growth rate is less than the market capitalization rate.
☐ Issuance of Dividend: If a firm is not issuing the dividends, the application of DDM model is useless. DDM model mainly depends on the dividends and when no dividends are issued, the valuation of the firm using DDM model is useless.
☐ Potentiality: When a firm is its initial stage or startup stage, it may have huge investment needs and it also may have a high growth potentiality. In such a cash, forecast of dividends will not be possible. Hence usage of DDM model to value the firm is not advisable.
Want to see more full solutions like this?
Chapter 18 Solutions
GEN COMBO LOOSELEAF INVESTMENTS; CONNECT ACCESS CARD
- Which of the following statements is true about a bond's yield to maturity (YTM)?A) YTM is the interest rate that makes the present value of bond payments equal to its current market priceB) YTM is only calculated at the time of purchaseC) YTM does not account for the bond’s coupon paymentsD) YTM is the same as the bond’s coupon rate if purchased at face valuearrow_forwardWhich of the following would likely decrease the cost of debt for a company?A) An increase in the company's credit ratingB) A decrease in the company's profitabilityC) A rise in interest rates across the marketD) An increase in the company's dividend payoutsarrow_forwardWhich of the following is considered a long-term financing source for a company?A) Accounts PayableB) Common StockC) Short-term loansD) Accrued Expenses helparrow_forward
- Which of the following is considered a long-term financing source for a company?A) Accounts PayableB) Common StockC) Short-term loansD) Accrued Expensesarrow_forwardWhat is the primary goal of financial management?A) Maximizing profitsB) Maximizing shareholder wealthC) Minimizing costsD) Ensuring liquidityhelp.arrow_forwardIf a bond has a coupon rate lower than the market interest rate, the bond will sell at:A) Par valueB) A premiumC) A discountD) Its face valuehelp.arrow_forward
- If a bond has a coupon rate lower than the market interest rate, the bond will sell at:A) Par valueB) A premiumC) A discountD) Its face valuearrow_forwardThe primary objective of financial accounting is to:a) Provide management with detailed reports for decision-making.b) Help the company save taxes.c) Provide financial information to external users.d) Track inventory levels. please help.arrow_forwardWhich of the following is an example of a capital budgeting decision?A) Determining the amount of inventory to keep on handB) Deciding whether to purchase a new piece of machineryC) Setting the credit terms for customersD) Deciding how much cash to keep in the bankarrow_forward
- For pueblo super market in st thomas usviarrow_forwardWhat is the methodology that capital markets serve as engines of economic growth and innovation? Could you help explain how methodology is critical to successful of the capital market? How are they also vulnerable to significant structural and behavioral problems? What are the appropriate uses of a qualitative single case study, and what types of research are best suited for the study of capital markets? What is the research framework of the capital market?arrow_forwardWhat is the purpose of the Capital Markets? What are the qualitative research questions that Capital Markets seek to understand or explain, while quantitative research questions seek to relate or measure? What could be the problems of Capital Markets, and how can the problems of Capital Markets be solved? How can the practice or issue be improved?arrow_forward
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning