Question

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

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.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

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.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You have been asked to perform and present a stock valuation to the CEO prior to...
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...
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....
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...
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...
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...
As the newly appointed financial analyst for Coverdale Office Machines Ltd., you have been asked to...
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...
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...
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...
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...
What strategy would you recommend for Dove (1) in responding (or in not responding) to consumers...
What strategy would you recommend for Dove (1) in responding (or in not responding) to consumers and (2) going forward (or not going forward) with the campaign? If they were to go forward with this campaign, should Dove revise its Real Beauty message and if, so, how? The Dove Real Beauty Campaign In 2004, with sales at approximately $2.5 billion, Dove saw an opportunity to tap into women’s self-perceptions of beauty to address female insecurities while building a connection between...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT