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Dear John,
Hope you are fine.
In Question 2 of June 2015 exam (part c) we should compare dividend growth model with earning yield valuation.
part of the answer is as below : (I have copied and pasted the below text from ACCA June 2015 exam answer)The two valuation methods relate to different valuation purposes in an acquisition context. The dividend growth model values a minority shareholding in a target company, while the earnings yield valuation gives a value from the perspective of the acquirer, provided the earnings yield used is appropriate.
Could you please explain this part? I don’t understand why dividend growth model is for minority shareholders while earning yield model is for acquirer?
Thank you
This is only relating to an acquisition.
It is future expected dividends always that determine the market value of shares.
However in the case of someone acquiring a company, they can decide for themselves what proportion of earnings will be distributed as dividends, which is why an earnings valuation is better. (A small (minority) shareholders obviously cannot influence how much is paid out as dividend).
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