To think critically about: In what circumstances, one would prefer to choose a dividend discount model instead of a free cash flow model to value a firm. Introduction: The dividend discount model (DDM)- It is a method where the stock prices of the companies are valued based on the methodology that the stock has a worth to provide the future dividends and is discounted back to their present values. Free cash flow (FCF) is a measure that states the amount of cash that a business generates after accounting for all the expenditures are capital in nature for example: Equipments, buildings etc.

Question

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Answer 1

Question

Chapter 13, Problem 1PS

Summary Introduction

To think critically about:

In what circumstances, one would prefer to choose a dividend discount model instead of a free cash flow model to value a firm.

Introduction:

The dividend discount model(DDM)- It is a method where the stock prices of the companies are valued based on the methodology that the stock has a worth to provide the future dividends and is discounted back to their present values.

Free cash flow(FCF) is a measure that states the amount of cash that a business generates after accounting for all the expenditures are capital in nature for example: Equipments, buildings etc.

Expert Solution & Answer

Answer to Problem 1PS

The answer is one would choose to use a dividend discount model to value a mature firm that pays a relatively stable dividend.

Explanation of Solution

In case of Free Cash Flow model, the firm is valued based on the cash flow available to it or its equity holders net of capital expenditures. Hence this approach is very useful for the firms that pay no dividends. However, for the firms that pay no dividends, Dividend discount model is difficult to implement as the basic assumption is the value of stock depends on dividend forecasts. Dividend discount model asserts that stock prices are determined ultimately by the cash flows accruing to stakeholders and those are in dividends.

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Students have asked these similar questions

Pam and Jim are saving money for their two children who they plan to send to university.The eldest child will enter university in 5 years while the younger will enter in 7 years. Each child is expected spend four years at university. University fees are currently R20 000 per year and are expected to grow at 5% per year. These fees are paid at the beginning of each year.Pam and Jim currently have R40 000 in their savings and their plan is to save a fixed amount each year for the next 5 years. The first deposit taking place at the end of the current year and the last deposit at the date the first university fees are paid.Pam and Jim expect to earn 10% per year on their investments.What amount should they invest each year to meet the cost of their children’s university fees?

You make a loan of R100 000, with annual payments being made at the end of each year for the next 5 years at a 10% interest rate. How much interest is paid in the second year?

Answer 2

Question

Chapter 13, Problem 1PS

Summary Introduction

To think critically about:

In what circumstances, one would prefer to choose a dividend discount model instead of a free cash flow model to value a firm.

Introduction:

The dividend discount model(DDM)- It is a method where the stock prices of the companies are valued based on the methodology that the stock has a worth to provide the future dividends and is discounted back to their present values.

Free cash flow(FCF) is a measure that states the amount of cash that a business generates after accounting for all the expenditures are capital in nature for example: Equipments, buildings etc.

Expert Solution & Answer

Answer to Problem 1PS

The answer is one would choose to use a dividend discount model to value a mature firm that pays a relatively stable dividend.

Explanation of Solution

In case of Free Cash Flow model, the firm is valued based on the cash flow available to it or its equity holders net of capital expenditures. Hence this approach is very useful for the firms that pay no dividends. However, for the firms that pay no dividends, Dividend discount model is difficult to implement as the basic assumption is the value of stock depends on dividend forecasts. Dividend discount model asserts that stock prices are determined ultimately by the cash flows accruing to stakeholders and those are in dividends.

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Answer 3

Question

Chapter 13, Problem 1PS

Summary Introduction

To think critically about:

In what circumstances, one would prefer to choose a dividend discount model instead of a free cash flow model to value a firm.

Introduction:

The dividend discount model(DDM)- It is a method where the stock prices of the companies are valued based on the methodology that the stock has a worth to provide the future dividends and is discounted back to their present values.

Free cash flow(FCF) is a measure that states the amount of cash that a business generates after accounting for all the expenditures are capital in nature for example: Equipments, buildings etc.

Expert Solution & Answer

Answer to Problem 1PS

The answer is one would choose to use a dividend discount model to value a mature firm that pays a relatively stable dividend.

Explanation of Solution

In case of Free Cash Flow model, the firm is valued based on the cash flow available to it or its equity holders net of capital expenditures. Hence this approach is very useful for the firms that pay no dividends. However, for the firms that pay no dividends, Dividend discount model is difficult to implement as the basic assumption is the value of stock depends on dividend forecasts. Dividend discount model asserts that stock prices are determined ultimately by the cash flows accruing to stakeholders and those are in dividends.

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Answer 4

Question

Chapter 13, Problem 1PS

Summary Introduction

To think critically about:

In what circumstances, one would prefer to choose a dividend discount model instead of a free cash flow model to value a firm.

Introduction:

The dividend discount model(DDM)- It is a method where the stock prices of the companies are valued based on the methodology that the stock has a worth to provide the future dividends and is discounted back to their present values.

Free cash flow(FCF) is a measure that states the amount of cash that a business generates after accounting for all the expenditures are capital in nature for example: Equipments, buildings etc.

Expert Solution & Answer

Answer to Problem 1PS

The answer is one would choose to use a dividend discount model to value a mature firm that pays a relatively stable dividend.

Explanation of Solution

In case of Free Cash Flow model, the firm is valued based on the cash flow available to it or its equity holders net of capital expenditures. Hence this approach is very useful for the firms that pay no dividends. However, for the firms that pay no dividends, Dividend discount model is difficult to implement as the basic assumption is the value of stock depends on dividend forecasts. Dividend discount model asserts that stock prices are determined ultimately by the cash flows accruing to stakeholders and those are in dividends.

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Answer 5

Chapter 13, Problem 1PS

Summary Introduction

To think critically about:

In what circumstances, one would prefer to choose a dividend discount model instead of a free cash flow model to value a firm.

Introduction:

The dividend discount model(DDM)- It is a method where the stock prices of the companies are valued based on the methodology that the stock has a worth to provide the future dividends and is discounted back to their present values.

Free cash flow(FCF) is a measure that states the amount of cash that a business generates after accounting for all the expenditures are capital in nature for example: Equipments, buildings etc.

Expert Solution & Answer

Answer to Problem 1PS

The answer is one would choose to use a dividend discount model to value a mature firm that pays a relatively stable dividend.

Explanation of Solution

In case of Free Cash Flow model, the firm is valued based on the cash flow available to it or its equity holders net of capital expenditures. Hence this approach is very useful for the firms that pay no dividends. However, for the firms that pay no dividends, Dividend discount model is difficult to implement as the basic assumption is the value of stock depends on dividend forecasts. Dividend discount model asserts that stock prices are determined ultimately by the cash flows accruing to stakeholders and those are in dividends.

Answer 6

Chapter 13, Problem 1PS

Summary Introduction

To think critically about:

In what circumstances, one would prefer to choose a dividend discount model instead of a free cash flow model to value a firm.

Introduction:

The dividend discount model(DDM)- It is a method where the stock prices of the companies are valued based on the methodology that the stock has a worth to provide the future dividends and is discounted back to their present values.

Free cash flow(FCF) is a measure that states the amount of cash that a business generates after accounting for all the expenditures are capital in nature for example: Equipments, buildings etc.

Expert Solution & Answer

Answer to Problem 1PS

The answer is one would choose to use a dividend discount model to value a mature firm that pays a relatively stable dividend.

Explanation of Solution

In case of Free Cash Flow model, the firm is valued based on the cash flow available to it or its equity holders net of capital expenditures. Hence this approach is very useful for the firms that pay no dividends. However, for the firms that pay no dividends, Dividend discount model is difficult to implement as the basic assumption is the value of stock depends on dividend forecasts. Dividend discount model asserts that stock prices are determined ultimately by the cash flows accruing to stakeholders and those are in dividends.

Answer 7

Chapter 13, Problem 1PS

Summary Introduction

To think critically about:

In what circumstances, one would prefer to choose a dividend discount model instead of a free cash flow model to value a firm.

Introduction:

The dividend discount model(DDM)- It is a method where the stock prices of the companies are valued based on the methodology that the stock has a worth to provide the future dividends and is discounted back to their present values.

Free cash flow(FCF) is a measure that states the amount of cash that a business generates after accounting for all the expenditures are capital in nature for example: Equipments, buildings etc.

Answer 8

Expert Solution & Answer

Answer to Problem 1PS

The answer is one would choose to use a dividend discount model to value a mature firm that pays a relatively stable dividend.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

In case of Free Cash Flow model, the firm is valued based on the cash flow available to it or its equity holders net of capital expenditures. Hence this approach is very useful for the firms that pay no dividends. However, for the firms that pay no dividends, Dividend discount model is difficult to implement as the basic assumption is the value of stock depends on dividend forecasts. Dividend discount model asserts that stock prices are determined ultimately by the cash flows accruing to stakeholders and those are in dividends.

Answer 12

Ch. 13 - Prob. 1PS Ch. 13 - Prob. 2PS Ch. 13 - If a security is underpriced [Lew intrinsic value...Ch. 13 - Deployment Specialists pays a current (annual)...Ch. 13 - Jand, Inc, currently pays a dividend of 1.22,...Ch. 13 - A firm pays a current dividend of 1, which is...Ch. 13 - Tri-coat Paints has a current market value of 41...Ch. 13 - A firm has current assets that could be sold for...Ch. 13 - Prob. 9PS Ch. 13 - Miltmar Corporation will pay a year-end dividend...

Answer to Problem 1PS

Explanation of Solution

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