Question:
How does one account for dividends in a DCF (assume WACC = cost of equity)
1) Ignore dividends and use WACC to calculate the firm value (In this case would Firm Value = Equity Value?)
2) If one were to calculate the the FCFE -> this would ignore dividends as well, since all the FCFE belongs to the equity holders?
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Ignore dividends (that is, do not deduct them). focus on free cash flow.
Firm value = equity value if and only if there is no debt. Discounting FCFF at WACC will yield firm value (i'm not sure why you claim WACC = Ce)
FCFE should also ignore dividends, it is the same as FCFF (less interest expense/debt service)
Hope this is helpful, If you can be more specific I'd be happy to help further.
Thanks bud. Mexican company, so no debt all equity.
you can get to either enterprise value (which you are calling firm value) or equity value using a DCF approach - calculate free cash flow to the firm (FCFF) and discount the cash flows at the WACC to get to enterprise value; calc free cash flow to equity (FCFE, which is just FCFF less debt servicing costs [i.e. principal and interest payments on debt]) and discount at the at the cost of equity (Ke) to get equity value.
In both cases if there is no debt in the firm, the two methods will lead to the same value and enterprise value will equal equity value (excludes cash of course) as FCFF = FCFE and the WACC = Ke.
Youre correct on the two observation points.
So basically.... what Whiskey said.
What Whiskey said. Dividends are only relevant from a proforma CF/IS point of view.
boesky ... that is wrong, you should not ignore them as they are part of free cash flow ... and you discount what you are taking out
Dividends are simply what shareholders demand to hold on to equity for extended periods. They are prices in themselves. They should not be ignored, but they are irrelevant to a discounted cash flow analysis.
DCF and dividends (Originally Posted: 06/24/2015)
I want to make a DCF for the company OUTFRONT(OUT) but the problem is that OUT is a dividend paying company. Should i ignore dividends in the DCF . What DCF i should use, FCFF or FCFE?
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