About Dividend Discount Model (DDM) and stock valuation, which statement is NOT CORRECT? In DDM, the risk-adjusted discount rates should be higher than the corresponding treasury spot rates. Stocks that don't pay dividend, such as, Amazon, Google, Facebook, etc., still have huge value. This contradicts DDM model. Other variables held constant, there is an inverse relation between stock prices and interest rates. By DDM, if a company is expected to never ever pays any cash in the future, its stock should be worth zero.

About Dividend Discount Model (DDM) and stock valuation, which statement is NOT CORRECT? In DDM, the risk-adjusted discount rates should be higher than the corresponding treasury spot rates. Stocks that don't pay dividend, such as, Amazon, Google, Facebook, etc., still have huge value. This contradicts DDM model. Other variables held constant, there is an inverse relation between stock prices and interest rates. By DDM, if a company is expected to never ever pays any cash in the future, its stock should be worth zero.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 3MC

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What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?
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