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equity valuationintermediate30 min
Stock Valuation Methods
Compare DDM, DCF, and relative valuation approaches for estimating a stock's intrinsic value.
What You'll Learn
- ✓Apply the Gordon Growth Model
- ✓Build a basic DCF
- ✓Use P/E and EV/EBITDA for sanity checks
1. Dividend Discount Model
Value = D1 / (r - g). Works for mature, stable dividend payers. Multi-stage DDM handles changing growth rates.
Key Points
- •Use D1, not D0
- •g must be less than r
- •Multi-stage for high-growth transitioning to stable
2. Discounted Cash Flow
Forecast FCFF for 5-10 years, estimate terminal value, discount everything at WACC.
Key Points
- •FCFF for enterprise value, FCFE for equity value
- •Terminal value is often 60-80% of total
- •Sensitivity-test growth and WACC assumptions
3. Relative Valuation
Compare P/E, EV/EBITDA, or P/B to peer companies. Quick but depends on peer selection.
Key Points
- •Choose peers with similar growth and risk
- •Trailing vs forward multiples matter
- •Multiples reflect market sentiment, not just fundamentals
Key Takeaways
- ★DCF is the gold standard but sensitive to assumptions
- ★Relative valuation is faster but less fundamental
- ★Always cross-check with at least two methods
Practice Questions
1. Stock pays $2 dividend, grows at 3%, required return 9%. What is the value?
D1 = $2.06. P = 2.06 / (0.09 - 0.03) = $34.33.
2. Sector P/E average is 20x. Company EPS = $5. What is the implied price?
$100 per share.
FAQs
Common questions about this topic
It depends on the company. DCF for any company with forecastable cash flows. DDM for dividend payers. Multiples for quick comparisons.
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