In this very example payout ratio is taken as 40% of EPS so in such a case can’t be use DDM instead of RI for valuation purpose? If not, then why?
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yes, you can but the Residual Income model starts with a value based on the balance sheet, the book value of equity, and adjusts this value by adding the present values of expected future residual income. Thus, in theory, the recognition of value is different, but the total present value, whether using expected dividends, expected FCFs, or book value plus residual income, should be consistent.
Thank you! Dhwani.