Sourav has illustrated in the initial portion of his discussion how it is that the HPR and DDM values of his selected firms will differ, mainly as a result of the different assumptions underlying each formula. Between the HPR model’s generalized distribution assumption, and the DDM’s time-consuming need to forecast each incremental dividend to be paid, investors are faced with a dilemma when determining which model to use when valuing a firm. Valkama et al (2013) then add further complication to the matter when they raise the issue of how special dividends and stock splits can then further impact the raw inputs of these formulae, as they will therefore require special adjustments to properly accommodate the relevance of these situations. With this information in mind, I intend on further developing the relevance of the DDM from the perspective of an investor that is looking to benefit from an acquisition.
Each January, Morningstar (2013) publishes a list of takeover targets for the coming year. In their 2013 list, they included 11 firms. In using this list to demonstrate the potential upside of an acquisition to target-firm shareholders, I expect to find that these firms demonstrate a lower DDM valuation than their actual HPR value, mainly because of the way in which their common shares have underperformed in relation to the value of their dividends, and therefore creating an opportunity for a firm to purchase the company at a discount, and realize the gains on a forward