Which of the following statements are NOT correct about the four models we used to value...

Which of the following statements are NOT correct about the four models we used to value stocks?

A. The Dividend-Discount model assumes that dividends are the only cashflow the firm provides to investors.

B. The Total Payouts model includes both dividends and share repurchases, but estimating share repurchases is difficult.

C. Using valuation based on comparable firms does not require strong assumptions about firm similarity.

D. The Discounted Free Cash Flow model requires us to know the firm’s cash and debt to calculate the Enterprise Value.

Expert Solution

The following are NOT correct statements about the four models we used to value stocks.

C. Using valuation based on comparable firms does not require strong assumptions about firm similarity.

Reason: A comparable company analysis is a process used to evaluate the value of a company, it operates under strong assumption that similar companies should have valuation multiples such as EV/EBITDA.

D. The Discounted Free Cash Flow model requires us to know the firm’s cash and debt to calculate the Enterprise Value.

Reason: Discounted cash flow model helps to determine the value of an investment based on its future cash flow but here only cash mentained but not considered as parent or future cash. Debt is outflow of cash so this model aplies to both financial investment for investors and for business owners to charge to their businesses such are purchasing new equipment.

The following are the right statements about the four models we used to value stocks.

A. The Dividend-Discount model assumes that dividends are the only cashflow the firm provides to investors.

Reason: The dividend discount model provides easy way to estimate a fair stock price. This was developed under the assumption that the intrinsic value of stock so dividends are essentially the positive cash flows generated by th company and provides to investors.

B. The Total Payouts model includes both dividends and share repurchases, but estimating share repurchases is difficult.

Reason: The meaning of total payouts model is how much money a company is returning to shareholders versus how much it is keeping on hand to reinvest for the purpose of growth, pay debts, diversification etc. Reinvest is also called as retained earning and repurchase. Yes it is dificult to calculate.

jeff jeffy answered 2 years ago

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