Concept explainers
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 present value.

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
INVESTMENTS(LL)W/CONNECT
- Crenshaw, Incorporated, is considering the purchase of a $367,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $67,000 in five years. The computer will replace five office employees whose combined annual salaries are $112,000. The machine will also immediately lower the firm's required net working capital by $87,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 22 percent. The appropriate discount rate is 15 percent. Calculate the NPV of this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. NPV Answer is complete but not entirely correct. S 103,141.80arrow_forwardYour firm is contemplating the purchase of a new $610,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $66,000 at the end of that time. You will save $240,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $81,000 (this is a one-time reduction). If the tax rate is 21 percent, what is the IRR for this project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. IRR %arrow_forwardQUESTION 1 Examine the information provided below and answer the following question. (10 MARKS) The hockey stick model of start-up financing, illustrated by the diagram below, has received a lot of attention in the entrepreneurial finance literature (Cumming & Johan, 2013; Kaplan & Strömberg, 2014; Gompers & Lerner, 2020). The model is often used to describe the typical funding and growth trajectory of many startups. The model emphasizes three main stages, each of which reflects a different phase of growth, risk, and funding expectations. Entrepreneur, 3 F's Debt(banks & microfinance) Research Business angels/Angel Venture funds/Venture capitalists Merger, Acquisition Grants investors PO Public market Growth (revenue) Break even point Pide 1st round Expansion 2nd round 3rd round Research commercial idea Pre-seed Initial concept Seed Early Expansion Financial stage Late IPO Inception and prototype Figure 1. The hockey stick model of start-up financing (Lasrado & Lugmayr, 2013) REQUIRED:…arrow_forward
- critically discuss the hockey stick model of a start-up financing. In your response, explain the model and discibe its three main stages, highlighting the key characteristics of each stage in terms of growth, risk, and funding expectations.arrow_forwardSolve this problem please .arrow_forwardSolve this finance question.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning



