Finance: A Case Study Of Three Approaches To Company Valuation

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Q2. Three approaches to company valuation

1. Dividend growth model
2. Price/ Earning model
3. Free cash flow

The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. In other words, it is used to value stocks based on the net present value of the future dividends.

The dividend growth rate is the annualized percentage rate of growth that a particular stock's dividend undergoes over a period of time


In this approach, we assume that the growth rate and rate of return are constant regardless number of years coming. We also assume that the rate of return is higher than the growth rate.

The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current
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Without the matching principle, the company might report the $6,000 of commission expense in January (when it is paid) instead of December (when the expense and the liability are incurred).

An income statement is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.

Revenue - Cash inflows or other enhancements of assets (including accounts receivable) of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations. It is usually presented as sales minus sales discounts, returns, and allowances. Every time a business sells a product or performs a service, it obtains revenue. This often is referred to as gross revenue or sales

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