In CFAi Book 3 text p.141 they calculate a DDM value using a terminal approach. P = D1/(k-g) In this case D1 was like twentyish dollars. On p.142 (one page later), they use the same terminal formula for a FCFE valuation and swap out the numerator with a t+1 FCFE estimate (approximately twice that of the dividend estimate for the same fictitious index), keeping the same growth rates and discount rate. P=FCFE1/(k-g) Obviously, in any real life scenario these valuations would be wildly different from each other. In LII, each valuation method was explained as being theoretical variants that were essentially equivalent within an academic setting. How do you reconcile two formulas using the same inputs and achieveing a 15% higher valuation.
Sorry Swanny. I don’t think I can help here. Maybe the two were constructed with comparison in mind?
Any asset can be valued considering the present value of future cash flows. Dividends are the cash flow that is paid out to equity holders. Free cash flow to equity is the cash that a firm generates through operations after paying taxes, capex, net working capital, and considering net inflows/outflows with bondholders (who are senior to equity). Therefore, they are similiar in theory. In practice, a firm can choose how much dividends they want to pay out, where as free cash flow to equity is the maximum available cash flow to equity.