OnewaytothinkoftheclassicDDMmodelwhereweignore
thecashbuildupistoassumethatcashiscompletelywasted.
In this extreme scenario, thevalue of the cash buildup is
effectivelyzero.Thatiswhythedividenddiscountmodelcan
be viewed as a floor on the value.
PER SHARE VERSUS AGGREGATE VALUATION
Someofthevaluationsthatwehavedoneinthischapterhave
usedpersharevaluesforearningsandcashflowsandarrived
ataper-shareestimateofvalueforequity.Othervaluations
usedaggregatenetincomeandcashflowsandarrivedatthe
aggregatevalueforequity.Whyuseoneapproachoverthe
other, and what are the pros and cons?
The per-share approach tends to be a little simpler, and
informationis usually moreaccessible. Mostdata services
reportearningspershareandanalystestimatesofgrowthin
earningspershare.Therearetworeasons,though,forsticking
withaggregatevaluation.Thefirstisthatitiseasiertokeep
operating assets separate from cash if we begin with net
incomeratherthanearningspershareandbreakitdowninto
net income from operating assets and cash income. The
second is that the number of shares to use to compute
per-share values can be subject to debate when there are
options,warrants,and convertiblebondsoutstanding.These
equity options issued by the firm can be converted into
shares, thus altering the number of shares outstanding.
Analystsdotrytofactorin theseoptionsbycomputingthe
partiallydiluted(wherein-the-moneyoptionsarecountedas
shares outstanding) or fully diluted (where all options are
counted) per-share values. However, options do not lend
themselves easily to this characterization. A much more