Valuation : Question 7
What is the difference between valuation methods based on discounted cash flows and those based on discounted dividends?

The dividends valuation method indirectly results in the valuation of the leverage effect (see chapter 40 of the Vernimmen) and the company’s dividend payment policy, while the free cash flows method measures the value of ROCE independently of the financial structure and the dividend payment policy. This last method should thus be the preferred method.

For more information, see chapter 32 of the Vernimmen.