Business Valuations

When a question is ask .. the DVM can be used when you see that the requirement is available . Example :
to use DVM you must have your ;

Do – current dividend
G- growth
Ke- cost of equity
and your Number of share

this is used mostly when you want to know if this new project or acquisition would benefit the share holders … that is if the previous price would gain increase . That is when we use the DVM( Dividend valuation model)

When you use PE ratio .. you are considering the project in the benefit of the company as a whole ….. that is to see if the company would enjoy from the new investment (Note :this is not to the benefit of the share holders but to the company as a whole) this what what we call value the whole company. this is normally use

when you have the PE ratio and the earning per share

If it’s in a takeover situation the acquiring company can (in theory) offer a price per share up to the value indicated and still be creating value for it’s shareholders. Be prepared to comment on EMH in relation to these methods and remember according to the syllabus that DCF methods are always considered superior because of the flaws in both DGM and PE models.

🙂 looks like you have not studied the text book… doing revision only…;)

There are FOUR valution methods
1)Asset Based => Book Value – NRV – Replacement cost
2)DVM = Po=Do(1+g)/Ke-g
3)PER= MV= Profit After TAX x PEratio
4)PV of free cash flow = [Operating Cashflows-Tax+Tax relief-Capital Exp] using WACC as DCF rate [find real rate using fisher fomula (r=(1+m)/(1+i)-1)
then deduct the Debt = MV

No 4 is the superior method to be used.

anyway NRV = minimum market value
Replacement cost= Maximum market value (incorporating income generated by the asset)

You do not do DCF use when using PER

DCF is used for PV of current cash flow – Debt