Omega Inc. has a history of abnormally high growth due to general economic fluct

Question

Omega Inc. has a history of abnormally high growth due to general economic fluctuations. Estimating the cost of common equity using the discounted cash flow approach is difficult because: A. ) the dividend yield is extremely difficult to estimate. B.) the proper growth rate is difficult to establish. C.) the market price of the common equity is very volatile. D.) the firm grows at a constant rate in perpetuity. e. the firm's historical data of dividend yield is unavailable. E.) The firm's historical data of divedend yield is unavailable.

Explanation / Answer

To use disounted cash flow method we need to use growth rate to estimate future cash flows and terminal value

But it is given that Omega has history of abnormally high growth due to general economic fluctuations

So it difficult to predict the future growth rate and if predicting future growth rate is difficult then applying discounted cash flow will also be difficult as we need to predict growth to estimate future cash flows and terminal value

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