Page 405 - FM Integrated WorkBook STUDENT 2018-19

Business valuations and market efficiency

Cash flow based valuation methods

4.1 The dividend valuation model (DVM)

This method can be used for valuing a minority shareholding in a
company. Minority investors have little influence on how earnings are
spent/distributed and rely on dividends as the source of income from
their investment.

P 0 = D

––

r e
P 0 = D 0(1 + g)
––––––– (on formula sheet)

r e – g

r e will be given in the question or may be calculated using the CAPM.

4.2 Strengths and weaknesses of the DVM

 problems estimating a future growth rate

 growth assumed to be zero or at a constant rate

 high sensitivity to changes in the assumptions used.

 few advantages over earnings based methods for controlling interests

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