Join Jim Stice for an in-depth discussion in this video Dividend-based valuation, part of Finance Foundations: Business Valuation.
- Let's use two dividend models to…estimate the value of McDonalds.…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 a perpetuity,…an infinite series of cash-flows of the same amount.…The appropriate valuation formula is as follows:…the Price = Dividends ÷ r, where r =…Interest rate being used in the analysis.…
Using this simple model the implied price per share…for McDonalds is $16.87, computed as follows;…$2.53, that's the dividend, ÷ 0.15,…that's the discount rate, $16.87.…That's one model. Now let's do another model,…The Cost In Dividend Growth model.…The assumption that dividends will be the same amount…each year forever is quite unreasonable,…given that the four years of dividend data we have for…McDonalds show the dividend amount increasing each year.…So in another more realistic dividend based valuation model,…
Make sure to check out the Stice brothers' other accounting and finance courses to understand the other economic factors that impact your business.
- Using market, cost, and income approaches to business valuation
- Valuing homes
- Valuing companies by multiples
- Using price-to-sales ratios to value companies
- Using discounted cash-flow analysis to estimate value
- Valuing McDonald's as a case study