Question

Discuss the similarities and differences between the discounted dividend and corporate valuation models.

Original Answer, No Plagiarism

Answer 1

Dividends are the major cash outlay for many corporations. At first glance it would appear that a company could distribute as much as possible to please it's shareholders. It might seem equally obvious that a firm could invest money for its's shareholders instead of paying dividends.

Discounted Dividend Model :

The Discounted Dividend Model is a more conservative variation of discounted cash flows that says a share of stock is worth the present vallue of its future dividends, rather than earnings. This model was popuularized by John Burr Williams in "The Theory of Investment Value".

"A stock is worth the present value of all the dividends ever to be paid upon it, no more, no less... Present earnings, outlook, financial condition, and capitalization should bear upon the price ofo a stock only as they assist buyers and sellers in estimating future dividends.

Corporate valuation Model determines the value of the company’s worth. This model was popularized by Ben Graham

Corporate Valuation Model:

Corporate Valuation Model is used to estimate the value of the firm in accordance to its assets, operations, non-operating assets, good will etc., In short, the cash flows of the firm are estimated by measuring the cash inflows at a discounted rate or Present Value (PV) of future cash flows.

Similarities and differences between the discounted dividend and corporate valuation models are Similarities:

Generally, Discounted Dividend Model and Corporate Valuation Model should determine the investor’s perception of the inherent value (intrinsic value) of an asset. It includes a company, stock, or real estate. This helps to know the underlying concepts of investment's intrinsic value, that is useful for value investors, in buying stocks and other investments at a discount.

Differences:

The main difference between these two models is the expected cash flow stream and the discounted rates that are used within the models. The discounted dividend model calculated the firm’s stock price as the present value of the expected future dividends at the firm’s required rate of return on equity. Meanwhile, the corporate valuation model calculates the firm’s stock price as the present value of the expected free cash flows at the firm’s weighted average cost of equity. The concepts used in these two models are different .

Hence, Dividend Discount Model and corporate valuation model having unique techniques in determining the value of the firm. In Dividend Discount Model dividend flows are discounted, whereas, in Corporate Valuation Model the cash flows would be discounted.