question on dividends real world vs model
here is a question I wanted to get an opinion on:
have two companies trading at $10. you discount your FCFF or FCFE and since both methods ignore dividends lets say you get at a valuation of $12 for both firms.
lets say the div yield on the firm that pays div is 2%.
so div. paying firm total upside: 22% non-div payinf firm : upside 20%
while the model ignores divs we all know that a firm that pays div. either needs to use current cash or future cash flows to continue to service the div, so if you made a a realistic model, shouldn't dividends be factored in, potentially reducing future cash flow,
obviously companies dont have an obligation to pay a div, but assuming a company that has always paid will continue to pay, I would argue that the true upside in the above case I mentioned is not 22% but something lower than that, even though the model tell you differently.
any thoughts.
Real world, CAPM hardly ever applies.
For me in the real world (I am a quant but invest on my PA), it's all about value value value followed by yield, yield, yield.
Your FCF calc should take into account dividen payments (cash out of the business)
arent u in finance 7 yrsß
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