You have been asked to perform a stock valuation prior to the annual shareholders meeting next...

You have been asked to perform a stock valuation prior to the annual shareholders meeting next week. The two models you have selected to value the firm are the dividend discount model and the discounted cash flow model. Explain why the estimates from the two valuation methods differ. Address the assumptions implicit in the models themselves as well as those you made during the valuation process.

Expert Solution

Answer:

Dividend Discount Model (DDM) use the expected future dividends that will be paid to the investors to arrive at the present value of the stock and Discounted Cash Flow (DCF) model uses the expected free cash flows to arrive at the present value of the stock.

Implicit as well as Self Assumptions in DDM:

- Growth rate remains stable
- Sustainable Growth Rate is used as the growth rate
- Cash flows are discounted using investors required rate of return which remains same in all the years
- Dividend payout of the firm is stable
- Company will pay dividends

Implicit as well as Self Assumptions in DCF:

- Cash flows are discounted using weighted average cost of capital which remains same in all the years
- Only the operating cash flows are considered
- Non-operating cash flows are excluded
- The present value excludes the value belongs to the lenders
- The corporate tax rate do not change

Rahul Sunny answered 6 months ago

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You have been asked to perform a stock valuation prior to the annual shareholders meeting next...

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