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Chapter 10

Cash flow based valuation – the

dividend valuation model (DVM)

4.1 The DVM theory and formula

The value of a share is the present value of the expected future
dividends, discounted at the shareholders’ required rate of return.

Formula (assuming a constant growth rate, g):

P 0 = d 1/(k e – g)

where:

g = forecast future growth rate in dividends

P 0 = total value of equity, when d 1 = total expected dividend in 1 year

P 0 = value per share, when d 1 = expected dividend per share in 1 year

d 1 is sometimes written d 0 (1+g) where d 0 is the current level of dividend

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