Dividend yield vs P/FCFE similar, standard, accounting

fishmarket

Regarding qbank Question ID#: 87719. Why is dividend yield preferred to P/FCFE when accounting standard differences are of concern? Are dividends and FCFE not subject to grossly similar accounting treatments?

mengxu

I would say that although both are affected by the accounting treatments, DDM relies less so than FCFE

DDM requires
1) Dividend
2) growth rate
3) payout ratio
4) ROE
5) required rate of return

whereas FCFE requires aside from the required rate of return
1) NI
2) depreciation (and therefore depreciation methods)
3) FCI
4) WCI
5) Net borrowings
6) tax rate

So the main determining factor is dividend where it doesn't even have to relate to NI as it can be paying a dividend regardless of how accounting treatment determines the NI.



Edited 1 time(s). Last edit at Thursday, May 13, 2010 at 10:58AM by joseph213.

zhaoyp

Payout ratio, Dividend ratio are internally dependent on

Payout = 1 - Dividend / NI
ROE = NI/CE

CE gets affected because of all the "accounting" shenanigans (that is your BV of Common Equity on your balance sheet).

so not sure what this question is asking.

Is it "a least likely" type of question?

Please post the full question here - not everyone has access to the "QBank" at work!

CP

zephyranalyst

The answer is saying that Dividend Yield is not affected by different standards in accounting. The analyst knows what the dividend is and knows what the stock price is and that's that.

Book value and FCFE depend on what the standards for accounting are.

ppls

dividends is less so -
remember dividends are a management discretion - as to how much they pay.

CP

yalo

Yes, but once they pay the dividend the yield is no longer in question. For example, the dividend yield of a company that just paid a $5 dividend with a current stock price of $40 is 12.5%.

That same company could say they have an FCFE of $50 million but that depends on what accounting standards you're talking about, i.e., what depreciation method you used, how many years, how you expensed, how capital expenditures and debt are treated, etc. FCFE could actually be $35 million or $60 million.

That's why P/FCFE is dependent on the standards and dividend yield is not.



Edited 1 time(s). Last edit at Thursday, May 13, 2010 at 12:47PM by kant.

giorgio10

Thank you, I finally got it. It's a question on after the fact comparison. Now that makes some sense. FCFE needs possible clean up to make it comparable to whatever definition of FCFE I fancy, while dividend yield is clearly an objective measure, this money is more tangible.