Topic 3 DQ 1 stock valuation

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

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The dividend discount model (DDM) is one of the most basic of the absolute valuation models. The dividend discount model calculates the “true” value of a firm based on the dividends the company¬† shareholders. The justification for using dividends to value a company is that dividends represent the actual cash flows going to the shareholder, and so valuing the present value of these cash flows should give you a value for how much the shares should be worth, (Maverick, 2015).For the discounted cash flow (DCF) is a valuation method used to estimate the value of an investment

When valuing stock it is important to first determine the present-day value of expected future cashflows (…). This method is known as the divided discount model which is a quantitative method that determines the present day price based on all future dividend payments (Chen, 2020). This concept removes future market conditions. Conducting this method will provide determination on the value of the current stock. Particularly speaking, if the value of the dividend discount model shows higher than the current trading price, the stock may be undervalued and worth a purchase (Chen, 2020). Opposite of that, if the DDM is lower than the current trading price, the stock is overvalued and a buy would not be promoted (Chen, 2020). can be done by using the value of stock formula: Value of stock = expected dividend per share / (cost of capital equity Рdividend growth rate)

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