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

Discounted cash flow method is one way to value a stock
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.