If the Model Below Is to Give a "Reasonable" Valuation

question 102

Multiple Choice

If the model below is to give a "reasonable" valuation of a stock, which of the following is not a valid assumption for the model?

• A) Growth, g, is negative.
• B) There will be no growth, i.e., g is zero.
• C) The growth rate exceeds the required rate of return.
• D) The required return is exceptionally high (r_s > 30%).
• E) All of the above are workable assumptions and are valid in the sense that the model can be used even if they hold true.

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Definitions:

Variance

A measure of how much values in a dataset differ from the mean of that dataset.

Phi

A measure of association for two binary variables, reflecting the strength and direction of their relationship.

Nominal-Level

Pertains to data classification into non-numeric categories that cannot be logically ordered or ranked.

Positive Correlation

A relationship between two variables where an increase in one variable is associated with an increase in the other variable.