Question

State one advantage and one disadvantage of both the dividend valuation and the price-earnings valuation methods used to valueshares

Answer 1

Dividend valuation

It is also known as Dividend Discounted Model.

Advantage:

Best advantage is it considered the growth opportunity and market valuation of company .

Disadvantage:

1. Does not consider non dividend factors such as brand, goodwill, customer base etc.
2. It ignore the reinvestment of dividend.

Price-earnings

Advantage:

P/E is an excellent tool to understand the overpriced or under-priced stock. It helps in comparison with past performance of the company.

Disadvantage:

1. It can’t be used for loss making company.
2. Based on one year earning and does not considered the future growth.