Question

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

Answer #1

**ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS
UP PLEASE.**

Differences between these two approaches:

DDM:

Whereas DDM more specific in its approach to calculate value per share.

DDM is based on the dividends the company pays its shareholders.

It's the present value of all the future dividends.

It can only be used for companies which pay a dividend.

DCF:

Whereas DCF more specific in its approach to calculate value per share.

DCF is based on the cash flows of the company over its lifetime.

It's the present value of all the future cash flows.

It can be used for both type of companies

1. That pay a dividend.

2. That don't pay a dividend.

Assumptions:

The WACC or Re, Growth rate.

Wacc= weighted average cost of capital.

Re= required rate of return.

You have been asked to perform and present a stock valuation to
the CEO prior to the annual shareholders meeting next week. The 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. Please include reference to back
it up.

3. You have been asked to analyze the stock of Watson Corp, and
need to calculate its cost of equity in order to do so. Your boss
has instructed you to calculate the cost of equity in two different
ways – the dividend growth model approach and the CAPM approach –
and then average the two figures to determine your final answer.
The stock currently trades at $45, and next year’s dividend
(D1) is estimated to be $1.18. The previous...

1. You have married into a family business and you are in charge
of the finances. Your father-in-law is considering an IPO and has
asked you to come up with estimates for the equity value. Here are
the figures you have been able to come up with so far: (12 pt.s) a)
2020 free cash flow: $9.0MM b) 2021 free cash flow: $9.8MM c) 2022
free cash flow: $10.5MM d) Annual FCF growth after 2022: 4% e) 2020
EBITDA: $9.5MM...

1. Assume that you are an equity analyst and you have been asked
to generate a twelve month forward price target for ShopSmart Plc,
a retail company. You decide to use the discounted Free Cash Flow
to Firm (FCFF) valuation model. For the year just ended you have
collected the following information on ShopSmart PLC:
? Net Income: £260 m
? Sales: £2,600 m
? Depreciation: £100 m
? Investment in fixed capital: £180 m
? Interest expense: £110 m...

You have been asked by an investor to value a restaurant. Last
year, the restaurant earned pretax operating income of $350,000.
Income has grown 5% annually during the last five years, and it is
expected to continue growing at that rate into the foreseeable
future. The annual change in working capital is $30,000, and
capital spending for maintenance exceeded depreciation in the prior
year by $20,000. Both working capital and the excess of capital
spending over depreciation are projected to...

You close your office door and take a few minutes to breathe.
Your meeting with David could have been a disaster in a dozen
different ways. Instead, it actually went well. By emphasizing your
shared passion for innovation you managed to establish a safe
foundation for an open discussion. You expressed your concerns
about David’s lack of reliability and together you outlined a plan
for improvement. Although he wasn’t happy, David didn’t dissolve
into one of his famous fits, and...

As the newly appointed financial analyst for Coverdale Office
Machines Ltd., you have been asked to evaluate two alternative
capital investment opportunities. The company’s corporate income
tax rate is 24%.
First, you must re-calculate the company’s cost of capital. The
company recently paid its annual dividend of $2.75 per common
share. According to your calculations, the company’s beta is 0.80.
The company’s common shares currently trade for $25.80 each on the
TSX. The market return is estimated at 16% and...

Penco is excited by the results of your previous work and has
asked you to review operations at Exciteco where it is an
institutional investor. Exciteco manufactures electronic components
for export worldwide, from factories in Finland, for use in
smartphones and hand-held gaming devices. These two markets are
supplied with similar components by two divisions, Phones Division
(P) and Gaming Division (G). Each division has its own selling,
purchasing, IT and research and development functions, but separate
IT systems. Some...

Willowbrook School Willowbrook School is a small private school
that has retained you to assist in the development of a new
information system for the school’s administrative needs.
Background Willowbrook School has decided to proceed to the systems
analysis phase, based on the findings and proposal you presented
after the preliminary investigation. A summary of your fact-finding
is as follows: Fact-Finding Summary Billing and payments for
Willowbrook School have two components, tuition, and after care.
Tuition is a fixed fee,...

As you saw from the lab PowerPoint slides last week, you will be
doing a research study looking at ‘Aggression Priming” for your
first paper. For this week’s discussion, I want you to discuss with
your group what you think this study is about. What is the
hypothesis? What theory does it come from? What do you predict will
happen (do you expect something different than the hypothesis in
the researcher instructions? If so, what and why?)? Do you think...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 9 minutes ago

asked 10 minutes ago

asked 25 minutes ago

asked 52 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago