Dividend Discount Model for CBA Stock Valuation

Finance
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Question-5 (a)
The price computed applying the dividend discount model is AUD 46.27 while the average of
stock’s price of CBA prevailing on the Australian Stock Exchange is AUD 71.55 (Appendix).
Thus, it could be observed that the theoretical price computed under dividend discount model is
lower than the actual price of the stock. This implies that the stock is overvalued in the market
and hence the investor could go for selling the holdings in market (Lazzati and Menichini, 2015).
Question-5 (b)
The valuation done applying dividend discount model clearly depicts that the stock is overvalued
and it indicates that the investor should sell the stock. The investor has an opportunity to book
profits by selling the stocks in the market. The results of dividend discount model implies that
the true worth of the stock is AUD 46.27 however it’s been sold in the market at AUD 71.55.
This indicates the chances that the stock might decline in future so the investor should think of
selling the stock and exit the market by booking the profit.
However, it is notable that the theoretical price computed under the dividend discount model is
purely based on the fundamental figures; it ignores the impact of market sentiments on the stock
price movements. Further, the valuation models like dividend discount model or PE Multiple
Model also suffers from their own limitations. Thus, the results arrived at under these models
might not present true picture (Ivanovski, Ivanovska and Narasanov, 2015).
Question-5 (c)
The efficient capital market hypothesis entails that the price of stocks in the efficient market
imbibe the impact of new information. This implies that the price of stock prevailing on the stock
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