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.
There are multiple alternatives to DGM as categorized below:
Intrinsic Method Alternatives:
Ideally DGM is an intrinsic method of valuation and hence if we are looking at an alternative in intrinsic method, then it needs to be somthing like DCF- Discounted Cash Flow
DCF has many types like FCFF (Free Cash Flow to Firm) , FCFE (Free Cash Flow to Equity), CCF (Capital Cash Flow)
Further there are other intrinsic models like APV (Adjusted present Value) method of valuation
Market Multiple Method:
If we are looking for Market Multiple Methods which are also called relative valuation method then we can use amny parameters like EV/ EBITDA, P/E etc
Specifically in terms of using Price to Earnings or Price to Sales:
Technically, Price to Earnings is the the correct metric to use and Price to Sales is the wrong metric (while it is used by some market analysts). Let me explain why Price to Earnings is correct while Price to Sales is wrong:
Price is for Equity shareholders and Earnings taken is also for Equity Share holders and hence Price to Earnings ratio is proper apple to apple comparison, while in Price to Sales, Price is for Equity Shareholders but Sales (generated from total assets is funded by both equity and debt) is for both equity and debt share holders and hence it becomes an apple to oranges comparison. Hence Price to Earnings is the proper technical comparison.
In cases where the compared companies do not have debt, we can say that Price to Sales can be used, else this is not a proper comparison metrics.
An alternative to the Dividend Growth Model (DGM) to estimate the market price of common stock...
Which of the following is not true? Group of answer choices The dividend growth model seeks to estimate the current market value of a stock by calculating the total future value of the future dividend payments. The dividend growth model cannot be used to estimate the current market value of stocks of firms that don’t issue any dividends. There are ways other than the dividend growth model to conduct stock valuation, including multiplying a benchmark Price-to-Earnings ratio with earnings per...
7. Which of the following is an assumption of the dividend growth model? a. The current dividend divided by 1+g equals the next dividend. b. G must be greater than R. c. The stock must pay dividends. d. Both price and dividend will grow at Rindefinitely e. The price and dividend will increase gradually over the years. 8. A stock with a dividend yield of 5% and a total yield of 11% a. Must be growing at 4%. b. Must...
7. Which of the following is an assumption of the dividend growth model? a. The current dividend divided by 1+g equals the next dividend. b. G must be greater than R. c. The stock must pay dividends. d. Both price and dividend will grow at Rindefinitely e. The price and dividend will increase gradually over the years. 8. A stock with a dividend yield of 5% and a total yield of 11% a. Must be growing at 4%. b. Must...
Dividend Discount Model in stable growth Your task is to value the stock price of Harrington Ltd with the Dividend Discount Model (DDM) in stable growth. You have the following information: Dividends per share DIV0 €1.89 Risk-free rate rF 3.00% Beta β 1.182 Expected return on stocks 8.50% Estimated long-term dividends growth rate 2.75% Required: (a) Calculate the value of the stock of Harrington Ltd using the Dividend Discount Model (DDM) in stable growth; (b) The stock currently trades at...
The dividend growth model: I. cannot be used to value zero-growth stocks. II. cannot be used to compute a stock price at any point in time. III. requires the required return to be higher than the growth rate. IV. assumes that dividends increase by a constant amount forever. V. none of the above is correct Multiple Choice 0 II, and IV only 0 V only 0 1, I, II, and IV only 0 Ill only 0 In order to estimate...
Dividend Growth Model & CAPM A company’s stock has the following attributes: Current Market price of $25.00 Current annual dividend of $1.50 Constant dividend growth rate of 4% A beta of 1.14 The risk-free rate is currently 3.4% and the market risk premium is 6.0%. If the risk-free rate suddenly jumps to 4.25% what happens to this company’s stock price (Give the price to 2 decimal places)?
Compare the FCF valuation model, dividend growth model and the market multiple method in estimating the intrinsic price of a stock
Answer the questions 1.What is the value of a stock based on the dividend-growth model if the firm currently pays a dividend of $1.30 that is growing annually at 5 percent and the required return is 9 percent? 2. If you purchase the stock in Problem 1 for $31.21, what is the return on the investment? 3. A financial analyst recommends purchasing DUDDZ, Inc. at $24.49. The stock pays a $1.60 dividend which is expected to grow annually at 4...
3. Use the Gordon growth model to estimate Microsoft’s current stock price. Assume next year’s dividend payment is $12.00, the appropriate discount rate is 6 percent, and the company’s profits are expected to grow by 2 percent annually.
A company's common stock has a market price of $38.00 per share and an expected dividend of $2.50 per share at the end of the coming year. The growth rate in dividends has been 3%, and the company expects to be able to maintain this growth rate forever. If the company issues new shares, the issue costs are expected to be $3.00 per share. What is the component cost of new common equity raised internally by reinvesting earnings for the...