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Basic Question 1 of 5
If a company is not dividend-paying, we can use ______ to define its cash flows.
II. free cash flow model
III. residual income model
I. dividend discount model
II. free cash flow model
III. residual income model
User Contributed Comments 4
| User | Comment |
|---|---|
| loo101 | residual income model helps to assess the value of a company. but is it really used to define its cash flows? |
| danlan2 | I think only II is right. |
| noonah | III is also right. It follows the broader definition of cash flows in the context of value appraisal of a business. |
| rhardin | Quote from page 304 of the CFA Institute material: "Can the DDM be applied to non-dividend-paying shares? In theory it can, as is illustrated later, but in practice it generally is not." So my take away is yes, it CAN, though probably shouldn't. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
compare dividends, free cash flow, and residual income as inputs to discounted cash flow models and identify investment situations for which each measure is suitable;
CFA® 2025 Level II Curriculum, Volume 3, Module 21.