Essay 1 Flashcards
(14 cards)
How can you judge a way a company approaches corporate finance
Through whether they max intrinsic or relative valuation
What is ddm
Value of asset is a function of is fundamentals
For intrinsic valuation what do they do
Price of stock = present value of all of stocks future dividends
Negatives of ddm
Companies don’t pay dividends
Companies don’t have dividend data
Unsustainable dividends growth
Not all of FCFE used on dividend payout
Board of directors chooses how much dividend to pay out
Positives of ddm
Simple to use and interpret
Dividends usually main sources of cash flow to investors
Who is ddm more suited to
Long term investors who want to grow company and aren’t faZED by changes in market mood
What is relative evaluation
Valuation based on what an investor would pay for something similar based on on price multiples
Common proce multiples
P/E
P/S
Why is relative valuation good
Quick and efficient as it doesn’t require assumptions about future cash flows / growth
Provides justification for value of a rock bc in your. Mind some stocks will be over valued or undervalued
Able to exploit changes in market mood in order to exploit undervalued stocks
Who is relative valuation better for
Short term investors
Which valuation method more popular
Relative valuation
What creates poor valuation
Ignoring market mood and focusing too much on fundamentals
When do relative and intrinsic valuations converge
In efficient markets
Example of companies not paying dividends
Google never paid
Apple only started paying in 2012
