Question

Discuss the following for the Malaysian based company top glove.

1.Predict the price of the common stock using models provided.
b. Discuss differences of actual vs. calculated stock price.
c. If the firm has non-constant growth, then assume a constant growth rate at the
end of the second year.

Answer 1

The price of the stock can be determined using the following methods:

1.Dividend Discount Model:

The dividend discount model is one of the basic techniques of absolute stock valuation. The DDM is based on the assumption that the company’s dividends represent the company’s cash flow to its shareholders. Essentially the model states that the intrinsic value of the company's stock price equals the present value of the company's future dividends.

2.Discounted cash Flow Model:

The discounted cash flow model is another popular method of absolute stock valuation. Under the DCF approach, the intrinsic value of a stock is calculated by discounting the company’s free cash flows to its present value. The main advantage of the DCF model is that it does not require any assumptions regarding the distribution of dividends. Thus, it is suitable for unknown dividend distribution.

3. Comparable Companies analysis:

The comparable analysis is an example of relative stock valuation. instead of deternining the intrinsic value of the stock using the company's Fundamentals, the comparable approach aims to derive a stock’s theoretical price using the price multiples of similar companies.

The most commonly used multiples include the price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA). The comparable companies analysis method is one of the simplest from a technical perspective.