The Gordon Dividend Discount Model Has a Number of Problems

question 29

Multiple Choice

The Gordon dividend discount model has a number of problems which include:

• A) the required rate of return must be greater than the expected growth rate. If this is not the case, then the model will estimate a negative value for the share price (which is impossible).
• B) if the expected growth rate is really greater than the required rate of return, then the Gordon growth model is not appropriate for valuation.
• C) this model assumes that the fundamentals of the firm will remain constant over time.
• D) all of the above.

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Definitions:

Total Variable Overhead Spending Variance

The difference between the actual variable overhead costs incurred and the expected (budgeted) variable overhead costs based on actual production levels.

Variable Overhead Efficiency Variance

The difference between the standard cost of variable overheads allocated for production and the actual cost incurred.

Supplies Cost

The expense associated with acquiring supplies necessary for the operation of a business, such as office supplies or manufacturing inputs.

Variable Manufacturing Overhead

Indirect manufacturing costs that change in total in direct proportion to changes in production volume, such as utilities or materials.