1. Compare the stock prices estimated by the discounted FCF model to the actual stock price....

1. Compare the stock prices estimated by the discounted FCF model to the actual stock price. What recommendations can you make as to whether clients should buy or sell stock based on your price estimates from the discounted FCF method? Why?

2. Explain why the stock price estimate from the discounted FCF model differs from the actual stock price

Assume the stock price is $7 per share, actual stock price is $4 per share

Solutions

Expert Solution

If the stock price as per FCF model is $7 per share, and the actual stock price is $4 per share:

Answer 1

~ The clients should BUY the stock.

~ Reason -

Since the Actual Stock Price ($4) is less than the Stock Price as per discounted FCF model ($7), the stock is undervalued in the market.

An undervalued stock should be bought, because if the client buys the stock today at the actual current price of $4, it will rise in the future to its intrinsic value of $7, hence benefiting those who bought it at $4.

Answer 2

The stock price estimate from the discounted FCF model can differ from the actual stock price, for the following reasons:

~ The intrinsic value (FCF model value) could be higher because of using a higher growth rate as compared to the implied growth rate of the market.

~ The intrinsic value could be higher because of using a lower required rate of return than implied return rate.

~ Overestimation of cash flow amount while calculating the Free Cash Flows under the FCF model valuation.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Compare Nike and Adidas estimated stock prices with actual stock prices as of January 2, 2019....

Compare Nike and Adidas estimated stock prices with actual stock prices as of January 2, 2019. Then tell whether each stock is undervalued or fair-valued or overvalued based on your estimation. What’s your decision if you hold these stocks? What’s your decision if you don’t hold these stocks? 1. Using annual stock price between 2013 and 2018, compute the following returns. For stock price data, use the closing price of the last trading day of the year: 1) Total Dollar...

The Discounted Dividend Model assumes that the price of a stock is the present value of...

The Discounted Dividend Model assumes that the price of a stock is the present value of what? (5 points)

How might the Discounted Dividend Model present challenges when attempting to calculate the stock price for...

How might the Discounted Dividend Model present challenges when attempting to calculate the stock price for rapidly growing technology companies? (5 points)

The general model for calculating a quantity variance is: Multiple Choice Actual price × (Actual quantity...

The general model for calculating a quantity variance is: Multiple Choice Actual price × (Actual quantity of inputs used − Standard quantity allowed for output). Standard price × (Actual quantity of inputs used − Standard quantity allowed for output). (Actual quantity of inputs used × Actual price) − (Standard quantity allowed for output × Standard price). Actual quantity of inputs used × (Actual price − Standard price). The following standards have been established for a raw material used to make...

Stocks and Their Valuation: Discounted Dividend Model The value of a share of common stock depends...

Stocks and Their Valuation: Discounted Dividend Model The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital gain. The actions of the marginal investor determine the equilibrium stock price. Market equilibrium occurs when...

1. You've recorded the following prices and dividend payments for a stock: Month Stock price Dividend...

1. You've recorded the following prices and dividend payments for a stock: Month Stock price Dividend 1 161.38 2 161.54 1.32 3 159.96 4 164.61 5 164.8 1.32 Part 1 What was the arithmetic average monthly return? Part 2 What was the geometric average return per month? Part 3 What was the total return over the entire period? 2. Which statements are correct? The geometric average return _____. Check all that apply: is better for forecasting returns over many periods...

1. Stock Prices, Expectations, and Policy Changes Explain, using the expectations model (and their role in...

1. Stock Prices, Expectations, and Policy Changes Explain, using the expectations model (and their role in determining asset prices) how the stock market is likely to react to each of the following scenarios: a) The Fed, as expected, raises the policy rate by 0.25 percentage points (25 basis points). b) The Fed unexpectedly raises the policy rate by 0.50 percentage points (50 basis points). c) At a meeting in which a rate hike was widely anticipated, the Fed surprises observers...

1. According to the model of Bertrand price competition, competing firms will set prices according to...

1. According to the model of Bertrand price competition, competing firms will set prices according to which rule: marginal revenue equal marginal cost marginal revenue equal to average cost price equal to marginal revenue price equal to marginal cost price equal to average cost 2. There are 2 firms that sell a certain software, Microsoft and Oracle. Microsoft invented the software and so they act as a market leader by first deciding how much of the software they are going...

Is it better for a firm's actual stock price in the market to be under, over,...

Is it better for a firm's actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of stockholders in general and a CEO who is about to exercise a million dollars in options and then retire? Explain.

Two stocks has the following year-end stock prices and dividends: Stock 1 Stock 2 Year Price...

Two stocks has the following year-end stock prices and dividends: Stock 1 Stock 2 Year Price Dividend Price Dividend 1 $70 $150 2 $75 $1 $163 $2 3 $74 $1 $156 $2 4 $80 $2 $173 $1 Which stock has a higher annual average capital gain yield over the four years? Which stock has a higher average dividend yield?If T-bill rate is 2.0 percent, which stock has a higher average nominal risk premium based on the annual average total return?What...

Subjects