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Business valuation

4.2 Strengths and weaknesses of the DVM

Strengths Weaknesses

 Sound theoretical basis.  Very difficult to forecast

dividends and dividend growth,
 Useful for valuing minority especially in perpetuity.

shareholdings where the
shareholder only receives  Particularly for unquoted
dividends from the entity, over companies, it can be difficult to
which he has no control. estimate the cost of equity (use
proxy company information or
CAPM in exam).

 For unquoted companies, a
consistent dividend policy with
constant growth rate is unlikely.

4.3 Note on growth rates

The dividend valuation model formula cannot be used directly when the
annual growth rate is expected to change. In such cases, the entity’s
lifespan should be segmented into the periods for which the varying
growth rates apply, and value each separately.

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