Question

please show work and be clear and neat

6. The advantage of the dividend discount model is that: A) It is simple B) Dividends are easily observable C) Capital gains can be earned instead of dividends D) Firms publish their dividend policies E) All of the above 7. Assume that Bank of America Corp. reported a net loss of $584 million for the fiscal quarter. That day, Bank of America's stock price climbed from $16.23 per share to $16.37. This demonstrates that: A) Equity valuation models are not related to company earnings B) Dividends are unrelated to earnings C) Equity valuation models can be irrational D) The net loss was smaller than investors expected E) All of the above 8. Assume the following free cash flows for Aiello Inc. for 2016 and forecasted FCFF for 2017 onward (in millions) (Smillions) Free cash flows to the firm (FCFF) Current 2017 $6,216 2018 $6,527 Forecast Horizon 2019 2020 $6,853 $7,196 2021 $7,556 Terminal Year $7,707 The DCF value of the firm using the FCFF information above, a discount rate of 6%, and an expected terminal growth rate of 2%, is: A) $176,900 million B) $126,028 million C) $145,189 million D) $181,836 million E) None of the above

Answer 1

6. The advantage of the dividend discount model is that it is simple. One of the advantage of this model is its simplicity. It requires less information and can be calculated easily. Investors use this model as a base standard. The Dividend Discount Model is a basis for complicated dividend valuation techniques.
The answer is A) It is simple.

7. Inspite of the net loss, the stock price climbed. This demonstrates that the net loss was smaller than investors expected. Equities are valued based on their expected future earnings. The loss that Bank of America reported was less than investors expected, hence the loss was not bad news for investors.
The answer is D) The net loss was smaller than investors expected.