Question

There are many different ways to value stocks. Discuss one other way to value a stock and identify how it is different than the dividend-discount model.

Answer #1

1. Here discount rate needs to be calculated based on target debt
equity ratio using cost of debt and cost of equity .

2. The free cash flow needs to be projected and discounted at cost
of capital to calculate the value of stock.

3. The risk factor here is included in the cost of capital.

It is different from dividend discount model because here cost of
equity is used to discount dividends . Dividends and not free cash
flow are projected for discounting.

Discuss the different ways in which common stock may be
owned.

There are three different models used to value stocks based on
different dividend patterns.
When choosing the model to use, one must do thorough research
concerning the company in question as no single model is entirely
perfect. Explain why this statement is correct.
Thank you!

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