Finance Management: Application of the Dividends Discount Model - Assignment Example

The paper "Finance Management: Application of the Dividends Discount Model" is a brilliant example of an assignment on finance and accounting.
Q1) Evaluate the application of the dividends discount model in the valuation of Olympus stock in view of the accounting fraud above.
Within stock valuation, Gordon and Supermodel growth techniques are used to determining the fundamental stock value whilst basing the valuation on future dividends sequences on condition that there is dividend per share earned or paid annually (Baker & Powell, 2007). Even though such models have proved to be useful in stock valuation, the model has demerits that include:

• Simple calculations involved in stock valuation within this model may prove to be disadvantageous especially when there is a concentration on the quantitative data and not qualitative data (Baker & Powell, 2007)
• Evidently, future changes may not be considered while valuing stock.
• Model is not applicable to unstable-growth stocks that pay dividends (Stoltz, 2007)
• Model is not applicable to stocks that do not pay dividends   

On the other hand, supermodel growth is used in valuing stock based on the fact that stock is assumed to have a period of non-constant growth especially in dividends as well as earnings. Some of the weaknesses of the supernormal growth model include (Stoltz, 2007):

• Only applicable when a firm is experiencing supernormal profits
• Vulnerable to various changes in the stock prices
• Sometimes it becomes difficult to incorporate future values or rather other aspects of stock valuation (Parrino, Moles & Kidwell, 2011)

(ii) To discuss the implications of recommendation to the film, to customers and to account payable and inventory.

            It is recommended that the firm extends the credit period to over 70 days in order to make customers in a position of enjoying the cash discounts. Cash discounts and other forms of discounts are usually aimed at attracting customers. If the firm continues to offer credit periods that allow them to provide cash discounts to the customers then it will be possible for them to attract many customers (Baker & Powell, 2007). Many films will, therefore, be sold in order for the customers to enjoy the cash discount being provided. Therefore, it would be better if the firm provides a credit period that allows for cash discounts.

            Another implication of extending the credit period to allow them to give cash discounts is that many customers will prefer to buy in credit terms hence the firm will not be incurring any discounts (Stoltz, 2007). Since the credit period is favorable, many customers will prefer to buy the films on credit terms hence will not be able to enjoy the cash discounts (Khan, & Jain, 2007; Correia, et al. 2010). Cash discounts are only given when customers buy goods on cash and this will not be the case. Hence, extending the credit period will attract many customers to buy the goods on credit thus allowing the firm to sell at the market price. Thereby, this will significantly increase the profitability of the firm.