when do you use the DDM as opposed to the GGM? Is it simply to use GGM when growth rate is constant?
I think whatever one the question asks for, as far as I know. Or if they ask you the value of a company and give you a bunch of variables, use the model that lets you plug in the variables, b/c a lot of time they’ll throw in useless variables to throw you off.
GGM is a just a DDM with constant growth rate. DDM is more general, and can handle different growth rates, but the terminal value of a multistage growth model is often solved by assuming a GGM constant growth model (or possibly a terminal P/E ratio times a future expected Earnings value) I don’t mean to be mean, but are you really asking this at level 2? GGM vs DDM is really a L1 issue, yes?
chadwick - get off your high horse…
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I passed Level 1 didn’t I? haha.
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My mistake. Good luck guys.
no problem. Thanks for the answer. It’s helpful.
Ok, one other thing: so when do you know when to use the DDM + GGM; GGM for the terminal value? Do you just make it out depending on the question?
DDM is for the explicit forecast period (i.e., valuing the cash flow period where the company is achieving supernormal growth) and GGM is for the terminal value (i.e., stable growth period in perpetuity).
bchad is right…that isn’t a smart question to ask.
I see everyone is feeling awfully edgy this morning. There are no dumb questions… better to ask it now than the day after the exam, no?
People who know me here know that I rarely attack anyone (unless in response to being attacked), and I did preface my earlier comment with “I don’t mean to be mean…”. Maybe I needed to be more direct and clearer, but the intent of that statement was “Is there something I’m missing about the question, something unique to how this stuff comes up at Level 2, because GGM and DDM are really Level 1 issues.”
I have a question, what does GGM or DDM even stand for??? Lol j/k j/k