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Basic Question 5 of 7
Company X is expected to pay a $5 dividend next year (year 1). The dividend will decline by 5% annually for the following three years. In Year 5, the company is expected to merge with another company which will be in its growth phase. The Year 5 after-merger dividend is expected to be $6. In Year 6 the dividend is expected to be at $5. It is then expected to growth by 4% annually thereafter. Which of the following matches DDM most appropriate to value company X?
B. H model.
C. Spreadsheet modeling.
A. Three-stage DDM.
B. H model.
C. Spreadsheet modeling.
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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
explain the assumptions and justify the selection of the two-stage DDM, the H-model, the three-stage DDM, or spreadsheet modeling to value a company's common shares;
describe terminal value and explain alternative approaches to determining the terminal value in a DDM;
calculate and interpret the value of common shares using the two-stage DDM, the H-model, and the three-stage DDM;
explain the use of spreadsheet modeling to forecast dividends and to value common shares;
evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.
CFA® 2025 Level II Curriculum, Volume 3, Module 21.