# DDM question

If the growth rate in dividends is too high, it should be replaced with: A) the average growth rate of the industry. B) a growth rate closer to that of gross domestic product (GDP). C) the geometric mean of historical growth rates. D) the growth rate in earnings per share.

If I had to pick an answer it would be A. It was a toss up between A and B. I’ll be dumbfounded if its C or D because I don’t remember reading that anywhere.

I would pick D, as dividends are based on earnings , If earnings are also high the its super growth model.

Niblita75 Wrote: ------------------------------------------------------- > If I had to pick an answer it would be A. It was a > toss up between A and B. I’ll be dumbfounded if > its C or D because I don’t remember reading that > anywhere. Ditto this…

I says its A as well. I think industry would be more appropriate as not all industires are cyclical and have earnings movements close to GDP.

I’m going with D.

i think it’s c

i’d also go with c. i just feel like i read this somewhere…

I know the answer as I did this question already. Here is a hint - everyone’s posted answer is wrong.

Note to CFA graders…tick down the minimum passing score. I would have got it wrong for sure.

wtf. really? we’re going to bring gdp into the mix??!!

I’m calling shenannigans on Schweser.

It would makes some sense if the question said: If the growth rate in dividends is too high for a mature company, it should be replaced with:

My roulette bet on C. It’s a blind guess!

gotta go with B- Drop it down to the long run rate of growth (ie GDP) A is out b/c what the industry is doing is not nearly as relevant as what the company itself is doing. Beside, different life cycles nullify this argument. C is out b/c it doesn’t account for the life cycle of the company. D is out b/c it doesn’t allow for “wiggle” room in case earnings come in low. Plus, earnings growth will decline with maturity. A firm does not want to decrease its div rate.

A

Clearly B.

I’d go with D … whats the ans ?

“Clearly B”? Say what? This question is retarded to begin with. DDM’s are just fiction anyway (how CFAI continues to teach dividend irrelevance and fixing up DDM models for valuation is beyond me). Shrinking a dividend growth rate toward GDP growth rate says something like I believe that the cash available to equity holders will grow at a rate similar to GDP growth. There are billions of reasons to believe that’s not true for any particular company. Edit: BTW - I like D best but I still think it’s retarded.

maratikus, Is there any more to this question? As Niblita pointed out, if this was in the context of industry analysis and the industry was deemed mature then company profits (on avg in the industry) would be moving towards GDP.