Spreadsheet (General) Modeling

Dividend discount models assume a stylized pattern of dividend growth. However, the dividend growth may follow a variety of patterns. Therefore, spreadsheet modeling is used to forecast any dividend pattern.

In addition, spreadsheets allow analysts to build complicated models, perform scenario analysis, and exchange information by sharing their spreadsheet models. Compared to the stylized models presented in this reading, spreadsheets allow pro forma statements to be forecast over a much longer horizon.

Question

Which of the following is least likely an advantage of using spreadsheet modeling?

1. Building complicated models.
2. Forecasting any dividend growth pattern.
3. Valuing a stock with a stylized pattern of dividend growth.

Solution

The correct answer is C. 

Valuing a stock with a stylized pattern of dividend growth does not require spreadsheet modeling. Instead, dividend discount models are more appropriately used to value this type of stock. 

A is incorrect. Spreadsheet modeling is practical when one is required to build complicated models. 

B is incorrect. By using spreadsheet modeling, different growth patterns can be used for each period.

Reading 23: Discounted Dividend Valuation

LOS 23 (m) Explain the use of spreadsheet modeling to forecast dividends and to value common shares.