Finance: dividend valuation model

1. Implementing a dividend valuation model to determine the value of the common shareholders' equity requires an analyst to measure three elements. Discuss what three elements need to be measured by the analyst.
a. the NPV needs to be measured by the analyst because all income earned by the company needs to be taken into account and a NPV found prior to determining how much to pay to shareholders in the form of dividends.
b. The analyst also needs to measure the stock's current market value. This enables the firm know the capitalization structure of the firm and how the dividend payment affects it.
c. Finally, the analyst needs to measure the firm's profitability. This is especially crucial because profitability in essence determines how much is going to be paid out to shareholders.

2. Under the assumption of clean surplus accounting how would you compute total dividends paid to common equity-holders in order to value the firm?
* The relationship between earnings, dividends and book value is usually demonstrated within the clean surplus equation of Bt = Bt-1+ Et-Dt.

* Therefore, in computation of the total dividends to be paid to common equity-holders, the summation of the earnings and book value needs to be put together from the net income from operations and the owner's equity portion.

3. Starting with free cash flows from operations discuss how an analyst would measure free cash flows to common equity shareholders.
The free cash flows to common equity shareholders would be measured by evaluating the cash positions of a company and determining how much of it is not tied up i.e. how much of the money is free to be used for any other purpose.

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!