Question

1. Identify two situations when you can apply the dividend approach method and the total company method. 2. Compare and analyze your findings in the Blog Activity.

Answer 1

Solution:

It is accepted that the methodologies or approaches allude to business valuation techniques.

i) Dividend Approach Method :

This is called Discounted Dividend Method (DDM). The DDM approach expresses that, current cost of an share is the aggregate of limited present values of every future profit paid on that share. For instance, if an organization pays $5 yearly profit on a share for next 5 years, its present share cost will be the aggregate of all the following 5-years profit or dividend, limited to the present, utilizing an appropriate discount rate (as a rule, cost of equity).

Discounted Dividend Method (DDM) is applicable in following circumstances:

1. The organization is a steady organization, paying constant flow of known profits..

2. The organization's (Dividend) development rate is not as much as its discount rate (or cost of equity or cost of capital, whichever is utilized as the discount rate).

ii) Total Company Method

The Asset-Based methodology of total organization strategy values the all out assets of a firm, as a valuation technique, rather than utilizing any cash- flow based methodology like DDM.

This methodology is generally appropriate in following circumstances:

1. When the firm is getting liquidated

2. When the firm is an objective for merger/acquisition by a gaining entity, which needs to esteem or value the objective firm or target firm.

Note :

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