Why is the answer B?
The gordon growth model can accurately value companies that are repurchasing shares when the analyst can adjust the dividend growth rate for the impact of share repurchases?
Read curriculum, page 219, first paragraph.
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ok so it seems like the DDM can be applied for share repurchase.
but isnt it harder to value a company that does share repurchase with DDM? I mean usually dividends are sticky and are much easier to predict, whereas buybacks are not a commitment and firms can do a buyback whenever they want; so how does the DDM model reflect the future cash flows of a company when a company is buying back shares? Wouldnt the free cash model or a relative valuation better than the DDM when it comes to valuing a company that does share buyback?
Just like dividends, share repurchases is also form of distribution back to shareholders.
Generally, it is harder to to model share repurchases due to the uncertainty in the size and timing of the repurchase.
In the free cashflow model, you can calculate the free cash flow based on the uses of cash (the non-popular way as opposed to the sources of cash), but again there is uncertainty in the timing and size of the timing of the repurchase.
In relative valuation model, we are not able to model in the repurchase.
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thanks for the clarification
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