…Ancis asks Nutting to explain the appropriate uses of two other valuation tools: the H-model and three-stage DDM. She says that the H-model is most suited to sustained high-growth companies while three-stage DDM is only appropriate to companies where the dividend growth rate is expected to decline in stages. Ancis says that three-stage DDM does not require a company’s growth rate to decline – it could equally well apply when a company’s growth is expected to be higher in the final stage than in the first. Regarding the statements made by Ancis and Nutting about the appropriate uses of the H-model and three-stage DDM: A) Ancis’s statement is correct; Nutting’s statement is correct. B) Ancis’s statement is incorrect; Nutting’s statement is correct. C) Ancis’s statement is correct; Nutting’s statement is incorrect. D) Ancis’s statement is incorrect; Nutting’s statement is incorrect.
C?
C Ancis is right
D?
I’ll say C. I see no reason why a 3 stage DDM would have to have the growth rate decline for it to be used. Does it?
I like C
D?
This is the epitomy of a Schweser Question. Very wordy, hard to figure out who is saying what, and then they flip the order of the responders in the answer. Very unCFAI-like in my experience.
D?
Makes sense… Your answer: D was incorrect. The correct answer was C) Ancis’s statement is correct; Nutting’s statement is incorrect. Ancis’s statement is technically correct. Although three-stage DDM traditionally uses progressively lower growth rates in each stage, that is not necessary. Three-stage DDM applies when growth rates vary in any manner, as long as they do so in three distinct stages. Nutting’s statement is incorrect because the H-model is not appropriate for a company with sustained dividend growth at any level (high or not). The H-model assumes that the company’s dividend growth rate declines linearly.
I think D. Sustained for the H-Model doesn’t make sense. The other is wrong because you can’t have a higher terminal growth than your initial growth.
C - H model has high growth, then it levels off to a sustained LT growth rate. 3 stage, her statement seems reasonable to me.
ozzy609 Wrote: ------------------------------------------------------- > This is the epitomy of a Schweser Question. Very > wordy, hard to figure out who is saying what, and > then they flip the order of the responders in the > answer. Very unCFAI-like in my experience. I think they do this on purpose to keep you on your toes on test day.
Well what is tricky is that typically the H model is used for abnormal growth declining to the market rate, but conversly, you could use it for a stock of a company restructuring or in a heavy investment or product development period which could be currently growing below the market rate but then increase to the market rate once it pushes past its current phase of laying groundwork for future productivity.
I think the problem would be with terminal values as Nib said. That is why I went with D. With the 3 stage you would be projecting high profits forever.
It’s bull. No way the CFAI would agree that you can have a much higher g rate than GDP or whatever they would use as a long term g rate.
CelticsFA11 Wrote: ------------------------------------------------------- > Makes sense… > > Your answer: D was incorrect. The correct answer > was C) Ancis’s statement is correct; Nutting’s > statement is incorrect. > > Ancis’s statement is technically correct. Although > three-stage DDM traditionally uses progressively > lower growth rates in each stage, that is not > necessary. Three-stage DDM applies when growth > rates vary in any manner, as long as they do so in > three distinct stages. Nutting’s statement is > incorrect because the H-model is not appropriate > for a company with sustained dividend growth at > any level (high or not). The H-model assumes that > the company’s dividend growth rate declines > linearly. This is a crap question. Althought technically correct it doesn’t make much sense and wouldn’t hold up empircally.
This is bullsh*t. So this means that the company will be able to sustain the higher growth rate (greater than GDP ) forever?
I agree, one of my many issues with Schweser.
You could have a lower than GDP growth rate for the first two stages and then step up to the long run average. Unusual, but possible. ETA, or more likely, low, then high, then long run average.