Final answer:
The free cash flow valuation model can be used if a company pays dividends as it is concerned with the cash available to all financial stakeholders after the company has reinvested in its operations. The payment of dividends is one factor that investors consider when estimating the present discounted value of a company's future cash flows.
Step-by-step explanation:
Yes, the free cash flow valuation model can certainly be used if a company pays dividends. The free cash flow valuation approach estimates the value of a company by projecting its future cash flows and then discounting them to the present value using an appropriate discount rate. When calculating the free cash flows, one would consider the company's profitability, capital expenditures, and changes in working capital. Although dividends are paid out to shareholders, they don't necessarily affect the free cash flows directly since they are financed from these flows after the company has reinvested in its operations. The free cash flow model focuses on the cash that a company generates which is available for distribution to all financial stakeholders, including debt holders and equity holders.
When applying present discounted value, taking into account both potential capital gains from the future sale of the stock and also dividends that might be paid is essential. These elements form part of an investor's return and therefore influence the present value. Different investors might have varying opinions about these factors, reflecting in their willingness to buy or sell a stock and their perceived value of it.
Ultimately, valuation is about determining what one is willing to pay presently for a stream of future benefits. This is why a stock's price can be so volatile: it represents the culmination of all different expectations about a company's future performance, including profits, potential capital gains, and dividends.