Asked by vidya sagar on Apr 25, 2024
Verified
Because the DDM requires multiple estimates, investors should
A) carefully examine inputs to the model.
B) perform sensitivity analysis on price estimates.
C) not use this model without expert assistance.
D) feel confident that DDM estimates are correct.
E) carefully examine inputs to the model and perform sensitivity analysis on price estimates.
DDM
The Dividend Discount Model, an investment valuation tool used to estimate the value of a company's stock by considering expected dividends and discounting them back to present value.
Sensitivity Analysis
A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions.
Model Inputs
The variables and parameters fed into a model to simulate different scenarios and predict outcomes.
- Understand the Dividend Discount Model (DDM) and its application in investment analysis.
- Understand the concept of sensitivity analysis in investment analysis.
Verified Answer
FW
Fatima WelchApr 28, 2024
Final Answer :
E
Explanation :
The Dividend Discount Model (DDM) involves various estimates, such as growth rates and discount rates, making it sensitive to input assumptions. Therefore, it's crucial for investors to carefully examine these inputs and perform sensitivity analysis on the price estimates to understand how changes in assumptions affect the valuation. This approach helps in making more informed investment decisions.
Learning Objectives
- Understand the Dividend Discount Model (DDM) and its application in investment analysis.
- Understand the concept of sensitivity analysis in investment analysis.