Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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Thecomputationofterminalvalueforequityinthedividend
discountmodelmirrorsthis calculation,ifthestable-period
payoutratioisestimatedfromthegrowthrateandreturnon
equity:


Whereastheterminalvaluesofequityinthetwomodelsare
thesame,thevalueofequity thatwederivetodaywillbe
differentif wefocusjuston dividendspaidratherthanthe
FCFE.


Sincethefirmpaysoutlessindividendsthanithasavailable
inFCFE,thedividenddiscountmodelyieldsalowervalueof
equity.Theflawinthisanalysis,though,isthattherewillbe
cashbuildingupinthefirminthedividenddiscountmodel.
Tomeasurethatcashbuildup,wewillinitiallyassume that
whateverdoesnotgetpaidoutasdividendseachyearwillbe
reinvested atthe cost ofequity of 9%.The resultingcash
balancebytheendofyear 5 isshowninthefollowingtablein
millions of dollars:

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