Which three of the statements describe problems with dividend valuation models? A) They are highly sensitive to the assumptions. B) The quality of input data is often poor. C) They are not dependent on assessment of average risk rates. D) If g exceeds k_E a nonsensical result occurs.

Question

Quizplus · Accepted Answer

A) Dividend valuation models are highly sensitive to the assumptions made, such as growth rates and discount rates. Small changes in these assumptions can lead to significant changes in the model's output. B) The quality of input data, such as historical dividend payments or earnings, can be poor and unreliable. This can affect the accuracy of the valuation model. C) This statement is false. Dividend valuation models rely heavily on the assessment of average risk rates, specifically the required rate of return or discount rate used to calculate the present value of future cash flows. D) If g, the expected growth rate of future dividend payments, exceeds k_E, the required rate of return for the investor, a nonsensical result occurs. This is known as the Gordon Growth Model's "dividend discount rate" problem.

Which Three of the Statements Describe Problems with Dividend Valuation