Question

How do I estimate the intrinsic value of Apple and Coca-cola stocks using the divided discount model approach and the PE multiplier approach?

Answer 1

1. The constant growth dividend discount model assumes that a company is growing at a constant rate. It is best used for large, stable companies that have consistent earnings and dividends. However, small- and medium-sized firms that are growing their earnings and dividends steadily can be valued using this approach as well. The formula for the constant growth model is:

Stock Price = D₁ ÷ (k – g)

Where:
D₁ = dividend for the coming year}
k = required rate of return; k must be}
greater than g
g = growth rate of dividends
(Decimals and not percentages must be used for the model to work.)

2. The price-to-earnings ratio, or P/E, is arguably the most popular method for valuing a company's stock. The ratio is so popular because it's simple, it's effective, and, tautologically, because everyone uses it.

The formula for the price-to-earnings ratio is very simple:

Price-to-earnings ratio = stock price / earnings per share

rearrange the equation to give the company's stock price,

Stock price = price-to-earnings ratio / earnings per share