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Valuation Models

Valuation models are essential tools in financial analysis that help estimate the value of assets and companies. The dividend discount model values a stock based on future dividend payments discounted to the present, while the comparable valuation model compares valuation multiples of similar companies.

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49 views22 pages

Valuation Models

Valuation models are essential tools in financial analysis that help estimate the value of assets and companies. The dividend discount model values a stock based on future dividend payments discounted to the present, while the comparable valuation model compares valuation multiples of similar companies.

Uploaded by

shristy2026
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Valuation Models

with a focus on Equity Valuation

Group 2:
TABLE OF CONTENTS

Introduction Inputs Required Value Calculation

Strengths &
Applicability
Weaknesses
Valuation Model
● Essential tools in financial analysis

● Used to estimate the value of an asset or a company

● Help investors determine the intrinsic value of a company's stock

● Provide insights into whether a stock is overvalued, undervalued, or fairly


valued

● Both models provide valuable perspectives on equity valuation

● Help investors make informed decisions by focusing on dividend returns (DDM)


or market comparisons (Comparable Valuation Method)
Dividend
Discount Model
Introduction

● Fundamental valuation method

● Estimates the intrinsic value of a company

● A stock is worth the sum of all its future dividend payments, discounted
back to their present value

● Particularly useful for valuing companies with a history of paying


consistent and predictable dividends
Assumptions

● The primary returns to investors come from dividends

● Dividends grow at a constant or variable rate

● The discount rate reflects the risk profile of the investment

● For the Gordon Growth Model, dividends are assumed to continue


indefinitely.
Inputs Required for DDM

● Expected Dividends (D1, D2, D3, etc.)


● Dividend Growth Rate (g) (ROE * b)
● Discount Rate (r): (Rf + (Rm-Rf) * β)
● Risk-Free Rate (Rf)
● Market Risk Premium (Rm - Rf)
● Beta (β)
Intrinsic Value of a stock

DDM

Gordon Growth Model Multi-Stage Model

Value of stock = +Pn


D1/(r-g)
Strengths & Weaknesses
Strengths

Simplicity: straightforward, making it easy for investors to grasp how it works

Focus on cash flows: uses dividends, the actual cash payments investors receive.

Long term perspective: holding investments for extended periods to realize their true
value

Intrinsic value: aims to find the true, fundamental value of a stock based on its expected
future dividends.
Weaknesses

Dividend Dependency: Not applicable to companies that do not pay dividends.

Assumption Sensitivity: Accuracy depends on estimating the growth rate (g) and
required rate of return (r).

Simplistic Assumptions: constant growth rate of dividends, which is often unrealistic.


Assumes a static business environment, ignoring potential changes.

Limited Applicability: for mature, stable companies, less effective for growth or tech
companies.
Applicability

Intrinsic Value of a Stock

Constant and Predictable dividend paying companies

Investment Potential Analysis

Merger & Acquisitions


Comparable
Valuation Model
Comparable Valuation Method

● Also known as the Market Multiple Approach

● Widely used technique in financial analysis

● Involves comparing the target company's valuation multiples to


those of similar companies in the same industry
Assumptions

● The selected companies are truly comparable in terms of industry,


size, and business model

● Market prices reflect all available information and the multiples are
appropriate for valuation

● The target company and its comparables have similar growth


prospects and risk profiles
Input required for Comparable valuation
method
1. Identification of Comparable Companies:
● Industry classification, Geographical location, Company size
2. Financial Metrics of the Target Company and Comparable Companies:
● Earnings Per Share (EPS), Book Value Per Share, Sales Per Share, Cash Flow Per
Share, EBITDA
3. Valuation Multiples from Comparables:
● P/E Ratios, P/B Ratios, P/S Ratios, P/CF Ratios, EV/EBITDA Ratios
4. Market Data:
● Current Stock Price, Market Capitalization, Total Debt and Cash for EV calculation
Equity Value Calculation

Value of Target firm


Benchmark
Value Value of Target Firm =
Benchmark Value * Applicable
Multiple
Market determined P/E
ratio of a similar
company

Applicable
Multiple
Earnings of the target
company
Comparable Valuation Method
Strengths

Market based: uses the latest market data, providing a realistic and up-to-date valuation

Simplicity and Intuitiveness: straightforward and allows for fast valuation estimates for
quick investment decision

Flexibility: choose from various ratios like P/E, EV/EBITDA, used for non dividend paying
firms

Relative Positioning: compare against its peers and industry insights


Comparable Valuation Method
Weaknesses

Subjectivity in Comparables: Differences in size, growth rates, and business models can
lead to misleading comparisons.

Market Inefficiencies: assumes the market is efficient, but if similar companies are
mispriced, the valuation will also be inaccurate.

Lack of Forward-Looking Perspective: relies on historical or current multiples, which may


not capture future growth prospects

Homogeneity Assumption: within the same industry, companies have different business
models, growth paths, and risk profiles
Applicability

Equity Valuation

Funding Negotiation

Property Valuation (Real Estate)

Merger & Acquisitions

Performance Evaluation & Planning


Quiz

https://forms.gle/XKpQRC4xMgpowDWA6
THANK YOU
Do you have any questions?

CREDITS: This presentation template was created by


Slidesgo, including icons by Flaticon, and
infographics & images by Freepik

Please keep this slide for attribution


REFERENCES
● https://www.investopedia.com/articles/fundamental/04/041404.asp#:~:text=The%
20dividend%20discount%20model%20allows,intrinsic%20value%20of%20a%20sto
ck.
● https://www.studysmarter.co.uk/explanations/business-studies/corporate-finance/c
omparables-valuation/#:~:text=Comparables%20valuation%2C%20also%20referre
d%20to,sell%20for%20the%20same%20price.
● https://corporatefinanceinstitute.com/resources/valuation/comparable-company-a
nalysis/
● Pros and Cons of Dividend Discount Models (DDMs) | StableBread
● Pros and Cons of the Comparable Company Analysis Valuation Model | StableBread

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