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Chapter 13

2.6 The dividend valuation model (DVM)

The DVM is suitable for valuing minority shareholdings, since it considers dividends
rather than overall company FCF or FCFE.

Theory: The value of an equity share is the present value of the
expected future dividends discounted at the shareholders’ required rate
of return.

Assuming a constant growth rate in dividends (g):

D (1 + g)
0
P = k – g
0
e
Where P 0 = value of a share

D 0 = current dividend per share

k e = cost of equity

Illustrations and further practice

Now try TYU 3 in Chapter 13

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