Question

Compare the FCF valuation model, dividend growth model and the market multiple method in estimating the intrinsic price of a stock

Answer 1

INTRINSIC VALUE OF STOCK

AS USUAL, PRICE OF A STOCK DEPENDS ON MARKET CONDITION AND OTHER EXTERNAL FACTORS WHICH ARE NOT UNDER THE CONTROL OF COMPANY. INTRINSIC VALUE OF STOCK REFERS TO THE VALUATION OF THE STOCK BASED ON THE INTERNAL FACTORS OF THE COMPANY ONLY. INTERNAL FACTORS INCLUDE PRODUCT OF THE FIRM, MANAGEMENT POLICIES, BRAND VALUE OF THE COMPANY ETC............ NO EXTERNAL FACTORS TO BE CONSIDERED DETERMINING THE INTRINSIC PRICE. IT HELP THE INVESTORS TO IDENTIFY UNDER PRICED STOCKS ...............

              THERE ARE VARIOUS METHODS FOR CALCULATING INTRINSIC PRICE OF STOCK LIKE DIVIDEND DISCOUNT METHOD, DISCOUNTED CASH FLOW METHOD, DIVIDEND GROWTH MODEL, MARKET MULTIPLE METHOD ETC.

HERE WE SHALL DISCUSS ABOUT F C F VALUATION MODEL, DIVIDEND GROWTH MODEL AND MARKET MULTIPLE METHOD

FREE CASH FLOW VALUATION MODEL

IN THIS MODEL, INTRINSIC VALUE OF STOCK CAN BE FOUND OUT FROM THE PRESENT VALUE OF FREE CASH FLOWS AVAILABLE IN THE COMPANY. FREE CASH FLOW MEANS THE CASH FLOW AVAILABLE FOR THE DISTRIBUTION TO ITS SHAREHOLDERS AND DEBTORS........THERE ARE TWO METHODS FOR FREE CASH FLOW VALUATION.      PROJECTED FREE CASH FLOW TO FIRM AND WEIGHTED AVERAGE COST OF CAPITAL.

DIVIDEND GROWTH MODEL

AS THE NAME INDICATES, IT IS THE METHOD TO CALCULATE STOCK VALUE BASED ON THE GROWTH RATE OF DIVIDEND WHICH MAY BE CONSTANT RATE OR A DIFFERENT RATE.

THE FORMULA FOR VALUATING STOCK IN THIS MODEL IS P

                P=D1/(k-g)

were, D = dividend rate

            G= dividend growth rate

              k=required rate of return

MARKET MULTIPLE METHOD

IN THIS METHOD VALUATION OF STOCKS ARE BASED ON THE MARKET VALUE OF STOCKS OF SIMILAR TYPE OF COMPANIES.BY COMPARING THE MARKET VALUES OF VARIOUS SIMILAR FIRMS, WE CAN STANDARDIZE IT BY USING A MULTIPLE RATE. A MULTIPLE SIMPLY MEANS THAT THE RATIO CALCULATED FROM MARKET VALUE OF STOCK AND THE ITEM ON FINANCIAL STATEMENTS.

FROM THESE MODELS F C F MODEL IS THE SIMPLEST ONE.

I THING THIS SOLUTION WILL HELP YOU FOR YOUR FURTHER STUDIES

THANK YOU,