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: