Question

Ginger Rogers makes two comments about discounted cash flow models applied to dividends and share repurchases:

Statement 1: Because DDMs do not incorporate the cash flows to investors from repurchases, they systematically understate the present value of future cash flows from a stock and underestimate the true rates of return, which should be based on total cash flows.

Statement 2: Some considerations that might argue against the corporate use of repurchases are their lack of transparency, potential unequal treatment of sellers and nonsellers, and their lesser ability (compared to cash dividends) to discipline managers.

Are Ginger’s statements correct?

Yes, both are correct. |
||

No, both are not correct. |
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No, only Statement 1 is correct. |
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No, only Statement 2 is correct. |

Answer #1

yes both are correct,

**1st**

DDMs are obsolete. Because DDMs do not incorporate the cash flows to investors from repurchases, they systematically understate the present value of future cash flows from a stock and underestimate the true rates of return, which should be based on total cash flows. Total cash flow models (based on dividends and repurchases combined) should replace DDMs for firms that repurchase shares

**2nd**

yes this statement is also correct because every share hodler is not able to compare the future cashflow of dividends and the repurchase price of the share, because Normal people are not good at the calculations of the time vakue of the money.

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