Notethatthecumulativecashbuildupeachyearisobtained
byaddingthepreviousyear’scashbalance,investedat9%,to
the cash held back in that year.
Thevaluebuiltupbytheendofyear 5 is$398.97millionand
thepresentvaluecanbecomputedbydiscountingbackat9%
to today.
Addingthis to thevalueobtained inthe dividenddiscount
model gives us the composite value of equity for the firm:
ThisisidenticaltotheFCFEvalue.Note,though,theimplicit
assumptions that allowed the two values to converge:
- The terminal values of equity in both models were
computedusing fundamentals—equityreinvestmentratesin
theFCFEmodelandpayoutratiosintheDDM.Ifanalysts
attachpayoutratiosorequityreinvestmentratesthatarenot
consistent with their growth and ROE assumptions in
computing terminal values,thetwo modelscan yieldvery
different values.(Usingindustry average payoutratiosand