###### Use of Sensitivity and Scenario Risk M ...

Sensitivity Risk Measures Remember that sensitivity risk measures include beta, duration, convexity, and... **Read More**

- It is simple and easy to implement.
- It is appropriate for valuing mature, dividend-paying companies.
- It is used to judge whether an equity market is fairly valued.
- It is used to model the last growth stage in a multistage model for a company with a high growth rate.

- The model is susceptible to the growth rate and required return rate estimates.
- The model must be used in collaboration with other models to value companies experiencing high growth rates.
- The model does not apply to companies not paying dividends.

## Question

Which of the following is

least likelya strength of the Gordon growth model?

- It is appropriate for dividend-paying companies.
- It is easy to implement.
- It is sensitive to the growth rate estimate.
## Solution

The correct answer is C.The sensitivity of the Gordon growth model to the growth rate estimate is one of the model’s limitations.

B is incorrect.The simplicity and ease of implementing the Gordon growth model are some of its strengths.

A is incorrect.One of the strengths of the Gordon growth model is it is appropriate for valuing dividend-paying companies.

Reading 23: Discounted Dividend Valuation

*LOS 23 (h) D**escribe strengths and limitations of the Gordon growth model and justify its selection to value a company’s common shares.*