Chapter 5 - Discounted Dividend Model Review Questions and Correct Answers
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Discounted Dividend Model
Institution
Discounted Dividend Model
Pv of expected future cash flows intrinsic value of common stock = what under DCF models
Chose class of DCF model, forecast cash flows, choose discount rate methodology, estimate discount rate four steps in applying DCF analysis
Estimate cash flows, discount for time value of money 2 elements of ...
Chapter 5 - Discounted Dividend Model
Review Questions and Correct Answers
Pv of expected future cash flows ✅intrinsic value of common stock = what under DCF
models
Chose class of DCF model, forecast cash flows, choose discount rate methodology,
estimate discount rate ✅four steps in applying DCF analysis
Estimate cash flows, discount for time value of money ✅2 elements of DCF valuation?
Risk free rate ✅what rate do you use to discount default risk free cash flows
Discount rate ✅you adjust the ______________ ___________ of equity cash flows to
reflect their risk
Dividend discount model, free cash flow, residual income ✅three main discounted
cash flow models
Dividends ✅DDM defines cash flows as
Reinvested earnings ✅DDM model also accounts for _________ __________
because it takes all future dividends into account
Less, so they're less sensitive to short run fluctuations in value ✅are dividends more or
less volatile than other return concepts?
Long run intrinsic value ✅DDM values reflect what
Mature, profitable companies tend to pay dividends bc they make a lot of money but
have no investment opportunities
Young profitable companies don't tend to pay dividends because they spend their
money on growth opportunities ✅how do dividends vary between mature and young
companies?
European ✅do more American or European companies pay dividends
Less dividends, more repurchases ✅how have cash dividends and repurchases
changed in recent years?
Stockholder ✅DDM defines cash flows at the ___________ level
, No. Use model like FCF or residual income that defines cash flows at company level
✅should you use DDM with a company that doesn't pay dividend?
No bc investor buying a small ownership share can't influence the timing or magnitude
of distributions of cash to shareholders ✅can ddm be used from a controlling
perspective?
Company pays dividends, dividend policy bears consistent relationship to company's
profitability, investor takes non-control perspective ✅3 times when it's good to use
DDM model
Operating cash flows ✅cash flow from selling goods and services
Investing cash flow ✅cash flow from buying and selling assets
Ex-investing in a new factory
Financing cash flow ✅cash flow from debt and equity
Ex-buying back stock or issuing bonds
False (may be committed to reinvestment or investment in a new asset) ✅true/false all
cash flow from operations is free
Cash flow from operations - capital expenditures ✅formula for free cash flow to firm?
Capital expenditures ✅needed to maintain the company at a going concern
Cash flow from operations that can be withdrawn without hurting the company ✅what
is FCFF?
Free cash flow to firm - payments to debtholders ✅formula for free cash flow to equity
FCFE ✅common equity can be as PV all expected future what
FCFF ✅this type of dcf model may be best when company's leverage is expected to
change a lot over time
Cash flow that can be redeployed outside company without affecting its capital
investments ✅what does FCFE represent
False ✅true/false FCF can't be used from a controlling perspective
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