Question #129 - Reading 20 Discounted Dividend Valuation

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

Page: 53

Status: Unattempted

Shared Context

- Calculate an equity value using the assumptions made by Karlson (to the nearest $m): A) $73m. B) $79m. C) $87m.

Question

Is Savickas correct in his comments regarding the DDM?

Answer Choices:

A. He is correct about the minority perspective, but not the sensitivity to the required rate of return assumption

B. He is correct about the minority perspective and the required rate of return assumption

C. He is incorrect in both statements

Explanation

The DDM is more appropriate for a minority shareholder. After a takeover, the acquirer will have control over the dividend policy and hence a FCF model is more appropriate. However, a DDM valuation is very sensitive to changes in the input assumptions.

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