Compare (advantages and disadvantages) the FCF valuation model, the dividend growth model and

the market multiple method to value stocks.

When valuing a stock, investors have several methods at their disposal. Three commonly used methods
are the Free Cash Flow (FCF) valuation model, the Dividend Growth model, and the Market Multiple
method. Each method has its advantages and disadvantages, and choosing the most appropriate
method depends on the specific circumstances and the company being valued.

The FCF valuation model is a widely used method that considers a company's ability to generate cash
flow. The FCF valuation model takes into account changes in capital expenditure and working capital,
providing a more accurate valuation of the company. This method is useful for valuing companies with
unpredictable earnings. One of the disadvantages of the FCF valuation model is that it requires reliable
projections of future cash flows, which can be difficult to estimate accurately. Another disadvantage is
that it doesn't account for the company's growth prospects, which can be a significant factor in
determining the value of a company. Additionally, the FCF valuation model can be sensitive to small
changes in assumptions, leading to significant variations in valuation.

The Dividend Growth model is a simple and easy-to-use method that uses dividends, which are a direct
return to shareholders, as a measure of the company's value. This method considers the company's
growth prospects by accounting for changes in dividend growth rates. One advantage of the Dividend
Growth model is that it is easy to use. One disadvantage is that it assumes a constant growth rate, which
is unlikely to hold true in the long run. Another disadvantage is that it doesn't account for changes in
capital expenditure or working capital, which can affect the company's ability to pay dividends.
Additionally, the Dividend Growth model can be difficult to use for companies that do not pay dividends.

The Market Multiple method is a method that uses market data to determine the company's value,
making it a more objective measure. This method considers the company's industry and peers, which
can be useful for benchmarking. Additionally, the Market Multiple method accounts for market
sentiment and investor expectations. One disadvantage of the Market Multiple method is that it can be
influenced by short-term market fluctuations and doesn't necessarily reflect the long-term value of the
company. Another disadvantage is that it assumes that the market is efficient, which may not always be
the case. Finally, the Market Multiple method can be difficult to use for companies that are not publicly
traded or have no comparable peers.

In conclusion, each valuation method has its advantages and disadvantages. The most appropriate
method depends on the specific circumstances and the company being valued. A combination of these
methods may be useful for obtaining a more comprehensive valuation. Investors should consider the
strengths and weaknesses of each method before selecting the most appropriate method to value a
stock. Ultimately, a well-informed investor should weigh multiple factors before making an investment
decision.

Ans2

The techniques available to investors for determining a stock's worth are diverse. The Free Cash Flow
(FCF) model, the Dividend Growth model, and the Market Multiple technique are the three most
frequent approaches. There are benefits and drawbacks to each approach, and selecting the best one
for a given set of circumstances and a certain business is essential.

The Free Cash Flow (FCF) valuation model is a popular choice since it takes a business's cash flow
generation capabilities into account. By factoring in shifts in both capital expenditure and working
capital, the FCF valuation methodology yields a more precise estimate of a company's true worth. In the
case of evaluating enterprises with uncertain profits, this approach is helpful. Future cash flow
predictions, which may be difficult to estimate precisely, are a necessary evil of the FCF value model.
Another drawback is that it ignores future earnings potential, which may be a major element in valuing a
firm. Yet because of its sensitivity to assumptions, the FCF valuation methodology may produce large
swings in value even when the underlying facts remain the same.

Dividends, a direct payout to shareholders, are used as a basis for valuation in the Dividend Growth
model, which is a straightforward and basic approach. This approach takes into consideration the
company's growth potential by adjusting for dividend growth rate adjustments. The Dividend Growth
model's simplicity is one of its main selling points. The assumption of a constant growth rate is
problematic since it is very unlikely to be maintained in the long term. Not taking into account shifts in
working capital and capital spending, both of which may impact a business's capacity to pay dividends, is
another drawback. In addition, businesses that do not provide dividends may have trouble
implementing the Dividend Growth model.

When market data is used in the Market Multiple technique, the value of the firm is determined in a
more objective manner. This approach is helpful for comparisons since it takes into account the firm's
industry and its competitors. The Market Multiple technique also takes into consideration investor
expectations and market mood. The Market Multiple approach has the potential drawback of being
affected by temporary shifts in the market and so not accurately reflecting the true worth of a firm. An
further drawback is that it presupposes an efficient market, which is not always the case. Lastly,
businesses that aren't publicly listed or don't have any direct competitors may find it challenging to
employ the Market Multiple technique.

Overall, there are benefits and drawbacks to using any particular valuation technique. The best
approach for determining a company's worth is contextual and company-specific. A more complete
value may be attained by combining several of these approaches. Prior to deciding on a stock valuation
strategy, investors should weigh the benefits and drawbacks of each approach. A savvy investor will
consider a number of criteria before making a final investment choice.

Answ3

The Free Cash Flow (FCF) valuation model is a popular option since it takes into account a company's
future cash flow. Changes in working capital and capital expenditure are also included into the FCF
valuation model, making for a more precise estimate of the company's worth. Valuing a company with
profits that are difficult to estimate might benefit from this approach (Pinto, 2020). The FCF valuation
approach has one major drawback in that it requires precise forecasts of future cash flows, which may
be difficult to anticipate. There's also the problem that it ignores the company's future potential, which
is often a major element in valuation. What's more, the FCF valuation approach is vulnerable to large
swings in value due to even modest changes in assumptions.

By looking at dividends as a direct return to shareholders, the Dividend Growth model provides a
straightforward and uncomplicated technique for determining a company's worth. This approach takes
into consideration the company's growth possibilities by factoring in dividend growth rate fluctuations.
The simplicity of the Dividend Growth concept is one of its many benefits. One drawback is that it makes
the optimistic assumption of a continuous growth rate, which is probably not going to be the case
(Fernández, 2007). However, it does not take into account other factors that might impact a company's
dividends, such as changes in capital expenditure or working capital. Companies that do not provide
dividends may also find it challenging to implement the Dividend Growth strategy.

Using market data, the Market Multiple approach is an impartial way to calculate a company's worth.
For purposes of comparison, this approach takes the company's industry and competitors into account.
Market mood and investor expectations may also be taken into consideration when using the Market
Multiple approach (Fernández, 2007). The Market Multiple technique may not accurately represent the
true worth of a firm since it is susceptible to short-term market movements. It also has the potential
drawback of assuming the market is efficient, which is not always the case. Lastly, businesses that aren't
publicly listed or don't have any direct competitors may have trouble using the Market Multiple
technique.

References

Fernández, P. (2007). Company valuation methods. The most common errors in valuations. IESE
Business School, 449, 1-27.

Pinto, J. E. (2020). Equity asset valuation. John Wiley & Sons.