Question

Section 2: Compare and contrast the dividend discount model to the free cash flow model with respect to their strengths and weaknesses in deriving the intrinsic share price. 2.

Answer 1

Dividend discount model:

Strengths -

1. It is easy to calculate and widely used.

2. It helps in stock value comparison with a variety of stock of portfolio.

Weakness -

1. Does not take to factors other than dividend growth rate and cost of equity

2. Has too assumptions

3. Is useful for stocks which only pay dividends

Free cash flow model:

Strengths:

1. Provides to near to accurate value of the firms intrinsic value of the stock

2. Does not consider accounting subjectivities

3. Is not influences by market conditions

Weakness:

1. Difficult to estimate future cash flows with accuracy

2. Involves multi layer calculations and assumptions