Compare the FCF valuation model, dividend growth model and the market multiple method in estimating the intrinsic price of a stock
INTRINSIC VALUE OF STOCK
AS USUAL, PRICE OF A STOCK DEPENDS ON MARKET CONDITION AND OTHER EXTERNAL FACTORS WHICH ARE NOT UNDER THE CONTROL OF COMPANY. INTRINSIC VALUE OF STOCK REFERS TO THE VALUATION OF THE STOCK BASED ON THE INTERNAL FACTORS OF THE COMPANY ONLY. INTERNAL FACTORS INCLUDE PRODUCT OF THE FIRM, MANAGEMENT POLICIES, BRAND VALUE OF THE COMPANY ETC............ NO EXTERNAL FACTORS TO BE CONSIDERED DETERMINING THE INTRINSIC PRICE. IT HELP THE INVESTORS TO IDENTIFY UNDER PRICED STOCKS ...............
THERE ARE VARIOUS METHODS FOR CALCULATING INTRINSIC PRICE OF STOCK LIKE DIVIDEND DISCOUNT METHOD, DISCOUNTED CASH FLOW METHOD, DIVIDEND GROWTH MODEL, MARKET MULTIPLE METHOD ETC.
HERE WE SHALL DISCUSS ABOUT F C F VALUATION MODEL, DIVIDEND GROWTH MODEL AND MARKET MULTIPLE METHOD
FREE CASH FLOW VALUATION MODEL
IN THIS MODEL, INTRINSIC VALUE OF STOCK CAN BE FOUND OUT FROM THE PRESENT VALUE OF FREE CASH FLOWS AVAILABLE IN THE COMPANY. FREE CASH FLOW MEANS THE CASH FLOW AVAILABLE FOR THE DISTRIBUTION TO ITS SHAREHOLDERS AND DEBTORS........THERE ARE TWO METHODS FOR FREE CASH FLOW VALUATION. PROJECTED FREE CASH FLOW TO FIRM AND WEIGHTED AVERAGE COST OF CAPITAL.
DIVIDEND GROWTH MODEL
AS THE NAME INDICATES, IT IS THE METHOD TO CALCULATE STOCK VALUE BASED ON THE GROWTH RATE OF DIVIDEND WHICH MAY BE CONSTANT RATE OR A DIFFERENT RATE.
THE FORMULA FOR VALUATING STOCK IN THIS MODEL IS P
P=D1/(k-g)
were, D = dividend rate
G= dividend growth rate
k=required rate of return
MARKET MULTIPLE METHOD
IN THIS METHOD VALUATION OF STOCKS ARE BASED ON THE MARKET VALUE OF STOCKS OF SIMILAR TYPE OF COMPANIES.BY COMPARING THE MARKET VALUES OF VARIOUS SIMILAR FIRMS, WE CAN STANDARDIZE IT BY USING A MULTIPLE RATE. A MULTIPLE SIMPLY MEANS THAT THE RATIO CALCULATED FROM MARKET VALUE OF STOCK AND THE ITEM ON FINANCIAL STATEMENTS.
FROM THESE MODELS F C F MODEL IS THE SIMPLEST ONE.
I THING THIS SOLUTION WILL HELP YOU FOR YOUR FURTHER STUDIES
THANK YOU,
Compare the FCF valuation model, dividend growth model and the market multiple method in estimating the...
One of the circumstances in which the Gordon growth valuation model for estimating the value of a share of stock should be used is ( A, the lack of data on dividend payments O B. declining dividends O C. an erratic dividend stream O D. a steady growth rate in dividends One of the circumstances in which the Gordon growth valuation model for estimating the value of a share of stock should be used is ( A, the lack of...
10. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you've done in previous problems, but it focuses on a firm's free cash flows (FCFS) instead of its dividends. Some firms don't pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Blur Corp....
8. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Stay Swift...
Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Charles Underwood Agency...
10. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Tropetech Inc....
6) Which of the following statements concerning the constant-growth dividend valuation model is (ar) correct 1. One simple method of estimating the dividend growth rate is to analyze the historical paltem of dividends II. The expected total return equals the return from capital gains plus the return from dividends TIL. The model is applicable to growth firms with initially high growth rates. IV. The intrinsic value calculated using this method can change from one investor to another if their risk-return...
8. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Sixty Second...
1. Fundamentals of the free cash flow corporate valuation model Several methods can be used to compute the intrinsic value of a share of a company's common stock. One method uses the free cash flow (FCF) valuation model, while the another method uses the dividend discount model value-as the sum of the value of its operating The FCF valuation model computes a firm's activities (Vop) and the value of firm's nonoperating value-also called its where: • From a manager's perspective,...
An alternative to the Dividend Growth Model (DGM) to estimate the market price of common stock in companies which do not pay dividends is use of a market multiple such as Price to Earnings or Price to Sales.
You estimate the following free-cash-flow (FCF) data for LipCo (in millions). The firm’s long-term FCF growth rate will be 3% per year after year three and the firm’s cost of capital is 9%. LipCo has no debt and 8 million shares outstanding. Using the corporate valuation model, what is the intrinsic price of one share of LipCo? (Round at the end) 9. You estimate the following free-cash-flow (FCF) data for LipCo (in millions). The firm's long-term FCF growth rate will...