maths

Discounted Cash Flow (DCF) Models

Dividend based Model

Valuet = å Dt+i
(1+r)i

Where Dt+i = expected cash dividends in each period to ¥
R = Investors required rate of return

It is rational to utilise the present value of future shareholder dividends payed from a company as the value of their claim on equity. The equity value of a firm is calculated by expected dividends for a given year discounted by the cost of equity.

Value can alternatively be derived by assuming that overtime dividends grow by a constant percentage. Thus:

Constant Dividend Growth Model

Vt = D1/ r – g

Where D1 = Next period dividends
g = Expected constant growth rate of dividends
r = Required rate of return

Contrasting the former div...