August 2006
Intermediate to advanced
696 pages
23h 12m
English
Content preview from Damodaran on Valuation
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5.5. CONCLUSION
The primary difference between the dividend discount models and the free cash flow to equity models lies in the definition of cash flows. The dividend discount model uses a strict definition of cash flow to equity (i.e., the expected dividends on the stock), whereas the FCFE model uses an expansive definition of cash flow to equity as the residual cash flow after meeting all financial obligations and investment needs. When firms pay dividends that are different from the FCFE, the values from the two models will be different. In valuing firms for takeovers or in valuing firms where there is a reasonable chance of changing corporate control, the value from the FCFE provides the better estimate of value.
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