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Im looking at solution for Chithurst Q 3b Dec 16 and I cant understand how they are using dividend valuation model to compare market capitalisation when my understanding is that this only provides a value for the share price?
The solution seems to be treating the market value of the share price as the same as market capitalisation ?
Take chithurst valuation using dividend valuation model for example.
Constant dividend 33m
cost of equity 11%
33/0.11 = 300m
Is this not the share price?
My understanding of the model is that market capitalisation should be the share price of 300 multiplied by the number of shares which i dont see provided in the question.
So why are we comparing share price of 300m with market capitalisation of 608m?
It does seem unlikely for a share price to be as high as 300m but is that what above formula for DVM provides?
$300M is not the share price!!!
To get the share price, you use the dividend per share. The dividend of $33M is the total dividend paid (otherwise it would have said dividend per share).
The market capitalisation is the number of share multiplied by the market value per share. You either use the dividend per share in order to get the market value per share, or you use the total dividend to get the total market value i.e. the market capitalisation.