Question

1. Use at least two valuation methods to quantify the firm’s estimated stock value. You may use any of the methods described in Chapter 18 of the textbook (DCF, DDM, Comparables (PE ratios, EV/EBITDA, PEG). 2. Point out key assumptions used in your valuations.

Please include the calculations and refrences

Answer 1

Stock valuation is a method of knowing the intrinsic value of stock and by this process investors will come to know whether stock is over or undervalued

(A) Valuation methods for estimation of Stock -

(1) Discounted Cash flow method :

Under this valuation method, company’s intrinsic value of stock is calculated by discounting its free cash flow to the present value. It is more technical in nature than the practical application. As it does not consider any details about distribution of dividend. Thus its more useful for the companies with unknown dividend distributions concept.

(2) Comparable Companies analysis :

This is a relative comparision tool instead of absolute figure. Here companys stock value is derived by comparing between two companies on basis of various price factors. Various ratios like P/E (price to earning), PB (Price to Book value), EBITDA (Enterprise value) . Major challenge is comparison between two companies which have similarities. But if both companies are of different industry and market capitalisation varies, than comparision becomes difficult.

(B) Assumptions used in valuation methods

- Cost of capital

- Time frame (Horizon period)

- Time value of money. (Discounting the cashflows to present value or calculating future value of current investment or liquidity).

- Future growth opportunit