From the course: Finance Foundations: Business Valuation
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Dividend-based valuation
From the course: Finance Foundations: Business Valuation
Dividend-based valuation
- Let's use two dividend models to estimate the value of McDonald's. First, the constant future dividend model, in this simple model, the business is valued as if the current cash dividend amount is a fixed payment to be received each year forever. Now, the valuation in this case is easy. The future dividend stream is perpetuity, an infinite series of cash flows of the same amount. The appropriate valuation formula is as follows. The price is equal to the dividend divided by R, where R is the interest rate being used in the analysis. Using this simple model, the implied price per share for McDonald's is $16.87 per share, computed as follows. 2.53, that's the dividend, divided by .15, that's the discount rate, 16.87. That's one model. Now, let's do another model, the constant dividend growth model. The assumption that dividends will be the same amount each year forever is quite unreasonable, given that the four years of…
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