Valuation models are used to disclose (reveal) the mispricing of securities. These models are exhibited(used) by fundamental(financial) analysts, who use information regarding the current and potential profitability of a company to measure its fair market value. Based on the results of analysis, financial analysts can then make informed, accurate decisions on whether to sell, hold or buy a stock.
There are alternative measures on how to value a company. Quantitative tools such as the dividend discount model and the relative valuation method are most commonly used to measure the ongoing value of the firm and emphasizing some of their limitations (Bodie, Kane, & Marcus, 2011).
Dividend discount model
The dividend discount model is the simplest …show more content…
Relative valuation methods are used because they are simple and easy to apply. It gives analysts a “quick and dirty” way to estimate the value of the company. However, relative valuation methods do not stipulate a direct estimate for a company’s fundamental value. They do not specify whether a firm is fairly priced but only indicates whether it is fairly priced relative to some benchmark which could include a group of comparable companies or its industry (Ferris & Petitt, 2013). The relative valuation method relies on the use of multiples which is principally a ratio between two financial …show more content…
Generally, this method reflects market volatility which is more appropriate for investors to take advantage of when deciding if he/she is interested in buying a stock (Bodie et al., 2011). The valuation measure also provides a better price estimation than the DDM model as the relative valuation method uses direct data from JNJ to calculate the intrinsic value; therefore we can see little difference when comparing the intrinsic value of the relative valuation and the market
There are alternative measures on how to value a company. Quantitative tools such as the dividend discount model and the relative valuation method are most commonly used to measure the ongoing value of the firm and emphasizing some of their limitations (Bodie, Kane, & Marcus, 2011).
Dividend discount model
The dividend discount model is the simplest …show more content…
Relative valuation methods are used because they are simple and easy to apply. It gives analysts a “quick and dirty” way to estimate the value of the company. However, relative valuation methods do not stipulate a direct estimate for a company’s fundamental value. They do not specify whether a firm is fairly priced but only indicates whether it is fairly priced relative to some benchmark which could include a group of comparable companies or its industry (Ferris & Petitt, 2013). The relative valuation method relies on the use of multiples which is principally a ratio between two financial …show more content…
Generally, this method reflects market volatility which is more appropriate for investors to take advantage of when deciding if he/she is interested in buying a stock (Bodie et al., 2011). The valuation measure also provides a better price estimation than the DDM model as the relative valuation method uses direct data from JNJ to calculate the intrinsic value; therefore we can see little difference when comparing the intrinsic value of the relative valuation and the market