1.

Dividend model - discount fows at R

E .
P
0
= (Div
1
+ P
1
)/(1+ R
E
) - if Cur price< this, then investors will buy
R
E
= (Div
1
+ P
1
)/P
0
- 1. Expected return = dividend yield (Div/P
0
) + Cap gain (P
1
-P
0
/P
0
)
All investors will attach same value irrespective of time horizon
P0 = D
1
/(R
E
-g) g = B * R (retained earnings % * expected return on future capital)
growth and yield are inversely related (higher g is lower yield) --> Yield = r-g/(1+g)
Discounted dividends is good for mature companies on account of predictability. If frms have erratic/no div history, use zero initially, estimate
mature and then use growth rate. DD method cannot be used for re-purchasers
Total payout model = PV of all future div+repurch/number of shares now - hard to predict repurchases though and hence ppl resort to other
methods
2. Equity Value = Ent.Value + Non-Op assets + Excess cash - Debt
B
L
= B
U
[1+D/E]