Technology - defensive or cyclical industry

问题如下：

The Gordon growth model is most appropriate for valuing the equity of a dividend-paying:

选项：

A.electric utility firm. B.technology company. C.automobile manufacturer.

解释：

Solution

1. Correct because of its assumption of a constant growth rate, the Gordon growth model is particularly appropriate for valuing the equity of dividend-paying companies that are relatively insensitive to the business cycle and in a mature growth phase. Examples might include an electric utility.

2. Incorrect because a technology firm is a cyclical company whose earnings are sensitive to the business cycle. Examples of cyclical industries are autos, housing, basic materials, industrials, and technology. Because of its assumption of a constant growth rate, the Gordon growth model is particularly appropriate for valuing the equity of dividend-paying companies that are relatively insensitive to the business cycle and in a mature growth phase.

3. Incorrect because an automobile manufacturer is a cyclical company whose earnings are sensitive to the business cycle. Examples of cyclical industries are autos, housing, basic materials, industrials, and technology. Because of its assumption of a constant growth rate, the Gordon growth model is particularly appropriate for valuing the equity of dividend-paying companies that are relatively insensitive to the business cycle and in a mature growth phase.

Equity Valuation: Concepts and Basic Tools

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