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Basic Question 0 of 13
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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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.