When using the free-cash flow model, cash flows are discounted at the weighted average cost of capital (WACC) and when using the dividend discount model, dividends are discounted at….
Case Study: Dimensional Fund Advisors, 2002
1. What are the philosophical beliefs of Dimension Fund Advisors (DFA)? What type of products
does DFA offer? How does DFA add value for its investors?
2. How is DFA’s business model related to the research of FAMA and French? Why do you think
small-cap stocks outperformed large-cap stocks historically? That is, do the better returns of
small-cap stocks reflect the compensation for extra risk or the correction in mispricing? In other
words, do you think small-cap stocks are riskier than large-cap stocks? Or small-cap stocks are
undervalued relative to large-cap stocks and such mispricing is corrected as time elapses?
Do you expect this pattern to continue?
3. Similarly, why do you think value stocks outperformed growth stocks historically? That is, do
The better returns of value stocks reflect risk compensation or corrected mispricing? Do you
Expect this pattern to continue?
4. Why does DFA care so much about trading? What rules does the firm adopt for its trading
practice? Do you think DFA can maintain its competitive advantage in trading in the future?
5. How does DFA’s new tax-management business work? What are the costs and the benefits? Is the tax-managed fund business likely to be successful on a broad scale?
6. How should DFA manage its strategy going forward? To continue its success, do you think DFA
should make any changes? If so, can you suggest any directions? If not, why?