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Describe the key differences between DDM, FCF and Residual Income models. BE BRIEF.

Describe the key differences between DDM, FCF and Residual Income models. BE BRIEF.

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Answer #1

The differece between DDM, FCF and Residual Income models are as follows:

Dividend Discount Model (DDM) Free Cash Flow (FCF) Residual Income
1 It predicts the price of stock based of the theory that the present value of the sum of all dividends in future is worth more than that will receive in future. FCF highlights the cash that company will generate after considering the cash outflows. residual income is the income firm generates after accounting the cost of capital.
2. It is used for valuation of the assets. FCF looks at the cash geneation with the firm . This models looks at the economic profitability of the firm rather than accounting profit.
3. It considers the future dividends Only the cash outflow and inflow are considered The data is taken from the financial statements
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