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Which method do you prefer for finding the intrinsic value of a stock; the dividend discount...

Which method do you prefer for finding the intrinsic value of a stock; the dividend discount method or the CAPM? WHY?

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Answer #1

DIVIDEND DISCOUNT MODEL: IT TAKES BASE AS THE CURRENT VALUE OF STOCK ON FUTURE VALUE OF DIVIDENDS. WE COMBINE ANNOUNCED DIVIDENDS WITH FINANCIAL PROJECTIONS TO GET DIVIDEND VALUE. THEN WE USE MODEL'S FORMULA TO DISCOUNT FUTURE VALUE OF DIVIDENDS TO PRESENT.

CAPITAL ASSET PRICING MODEL: IN THIS MODEL, WE CONSIDER MANY FACTORS:

  • EXPECTED RATE OF RETURN
  • RISK FREE RATE OF RETURN
  • MARKET'S AVERAGE RATE OF RETURN
  • SENSITIVITY OF THE INVESTMENTV?

WE GENERALLY PREFER CAPM OVER DDM AS DDM IS UNSUCCESSFUL IF OUR INVESTMENT ISN'T ISSUING DIVIDENDS. CAPM HAS ADVANTAGE AS IT LOOKS ON MANY OTHER FACTORS THAN DIVIDEND ALONE.

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