{"id":1996,"date":"2019-09-27T13:33:00","date_gmt":"2019-09-27T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1996"},"modified":"2026-02-17T20:12:12","modified_gmt":"2026-02-17T20:12:12","slug":"advantages-disadvantages-category-valuation-model","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/equity\/advantages-disadvantages-category-valuation-model\/","title":{"rendered":"Categories of Valuation Model"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following models would be the most helpful in valuing a Silicon Valley startup firm?\",\n    \"text\": \"Which of the following models would be the most helpful in valuing a Sillicon Valley startup firm?\\n\\nA. Multiplier model.\\n\\nB. Asset-based model.\\n\\nC. Multistage dividend discount model.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. Multiplier models are particularly useful for valuing startups with negative earnings, which is common in Silicon Valley. They also work well when there are many comparable startups raising capital.\\n\\nAsset-based models are less useful because startups typically lack significant tangible assets. Dividend discount models are also inappropriate because startups rarely pay dividends.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/GWw4je023oo?si=wMXWjb8WuzK5LMHd\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Free Cash Flow to Equity (FCFE) Model<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Advantages: <\/strong>aims to calculate a company\u2019s capacity to pay future dividends, going beyond simply discounting expected dividends. This approach may provide a more useful valuation, especially when the company does not pay dividends or dividends are sporadic.<\/li>\n\n\n\n<li><strong>Disadvantages: <\/strong>calculation is more complicated than a standard dividend discount model, and more assumptions must be made.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Gordon (Constant) Growth Dividend Discount Model<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Advantages: <\/strong>useful in valuing defensive companies at a mature life-cycle stage. The calculation is intuitive and simple.<\/li>\n\n\n\n<li><strong>Disadvantages: w<\/strong>hile a single growth rate makes the calculation easy, it isn\u2019t always very practical for valuing complex companies in uncertain economic environments.<\/li>\n<\/ul>\n\n\n\n<div style=\"margin:18px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" \n     target=\"_blank\" \n     rel=\"noopener noreferrer\"\n     style=\"\n        display:block;\n        text-align:center;\n        padding:14px 18px;\n        border:2px solid #2F5BFF;\n        border-radius:18px;\n        color:#2F5BFF;\n        font-weight:600;\n        font-size:16px;\n        text-decoration:none;\n        background-color:#f9faff;\n     \">\n     Practice CFA questions on equity valuation models.\n  <\/a>\n<\/div>\n\n\n\n<h2><strong>Multistage Dividend Discount Model<\/strong><\/h2>\n<ul>\n<li><strong>Advantages: <\/strong>allows for more flexibility than the constant growth model as an analyst can include however many growth rates may be appropriate for a given company\u2019s valuation. This is particularly useful in the valuation of companies at an early stage in their life-cycle.<\/li>\n<li><strong>Disadvantages: <\/strong>calculation isn\u2019t as clean and simple as the constant growth model. While the model allows for flexibility, it is oftentimes difficult to project multiple separate growth rates in a company\u2019s future.<\/li>\n<\/ul>\n<h2><strong>Multiplier Models<\/strong><\/h2>\n<ul>\n<li><strong>Advantages: <\/strong>can take comparable companies into account and may prove particularly useful in valuing companies with negative earnings. Limits the amount of projection necessary and ties the valuation into historical data. Price multiples have shown to be fairly good predictors of future performance.<\/li>\n<li><strong>Disadvantages: <\/strong>a comparable company analysis may be skewed by mispricing across the given industry or peer group.<\/li>\n<\/ul>\n<h2><strong>Asset-Based Valuation Models<\/strong><\/h2>\n<ul>\n<li><strong>Advantages: <\/strong>simple calculation and no projections necessary, particularly useful in valuing firms that are heavy in current assets and light in intangibles. Also useful in supplementing other valuation methods.<\/li>\n<li><strong>Disadvantages: <\/strong>not usually the best stand-alone option for valuing firms as going concerns. The model doesn\u2019t take into account current or expected cash flows, earnings, or growth rates.<\/li>\n<\/ul>\n<blockquote>\n<h2>Question<\/h2>\n<p>Which of the following models would be the most helpful in valuing a Sillicon Valley startup firm?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Multiplier model.<\/li>\n<li data-tadv-p=\"keep\">Asset-based model.<\/li>\n<li data-tadv-p=\"keep\">Multistage dividend discount model.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Multiplier models are particularly useful in valuing companies with negative earnings, which is often the case for startup companies. Also, there should be many comparable startups in the same geographical location raising capital, which makes the valuation easier.<\/p>\n<p><strong>B is incorrect.<\/strong> A startup firm usually does not have many tangible assets.<\/p>\n<p><strong>C is incorrect.<\/strong> While the multistage dividend discount model can include different growth rates, a startup company is rarely paying dividends. Therefore, this model would not be of any help.<\/p>\n<\/blockquote>\n\n\n<div style=\"text-align:center; margin:40px 0 20px;\">\n\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" \n     target=\"_blank\" \n     rel=\"noopener noreferrer\"\n     style=\"\n        display:inline-block;\n        background:#3E73D9;\n        color:#ffffff;\n        padding:16px 34px;\n        border-radius:50px;\n        font-weight:700;\n        font-size:18px;\n        text-decoration:none;\n     \">\n     Start Free Trial\n  <\/a>\n\n  <p style=\"\n        margin-top:18px;\n        font-size:16px;\n        line-height:1.6;\n        max-width:700px;\n        margin-left:auto;\n        margin-right:auto;\n        color:#333333;\n     \">\n     Strengthen your CFA Level I Equity preparation with exam-style questions, QBank drills, and full mock exams designed to help you evaluate valuation models and apply them effectively under exam conditions.\n  <\/p>\n\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>Free Cash Flow to Equity (FCFE) Model Gordon (Constant) Growth Dividend Discount Model Practice CFA questions on equity valuation models. Multistage Dividend Discount Model Advantages: allows for more flexibility than the constant growth model as an analyst can include however&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8],"tags":[],"class_list":["post-1996","post","type-post","status-publish","format-standard","hentry","category-equity","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Categories of Valuation Models | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Explore different valuation models, their advantages, and limitations, especially for companies with irregular or no dividend payments.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, 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