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Limitations of Discounted Cash Flow Method

   

Added on  2019-10-30

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Running head: FINANCEFinanceName of the Student:Name of the University:Authors Note:
Limitations of Discounted Cash Flow Method_1

1FINANCETable of ContentsAnswer to Question 2......................................................................................................................2a)......................................................................................................................................................2b)......................................................................................................................................................2c)......................................................................................................................................................3Answer to Question 3......................................................................................................................61.......................................................................................................................................................62.......................................................................................................................................................6Reference.......................................................................................................................................10
Limitations of Discounted Cash Flow Method_2

2FINANCEAnswer to Question 2a)The price-earnings ratio is one of the common method of valuing a company. In thismethod, value of company is determined from the Price earnings ratio of the similarly quotedcompany (Brigham and Ehrhardt 2013). The calculation showing market value of company usingthe PE ratio is given below:Statement showing Valuation using Price Earnings ratioParticularsAmountMarket Price per share £ 3.89 Earnings per share £ 0.21 Price Earnings ratio of Aztec (A)18.52Distributable Earning £ 40.40 Number of shares147.00Earnings Per share of Trojan plc (b) £ 0.27 Value per share of Trojan plc (AXB) £ 5.09 Total Market value £ 748.36 Table 1: Valuation using PE ratio(Source: Created by Author)b)Statement showing valuation using Dividend Valuation MethodParticularsAmountCurrent Dividend (D) £ 0.13 Risk free rate of return (rf)5%Return on the market (rm)11%Beta (B)1.10%Required rate of Return (K)5.07%
Limitations of Discounted Cash Flow Method_3

3FINANCEGrowth rate2%market value per share £ 4.32 Total market value £ 635.75 Table 2: Valuation of shares using Dividend valuation method(Source: created by Author)The table above indicates the valuation of shares using the dividend valuation method.The expected return that is used in the formula has been calculated using the Capital assetspricing model. c)Statement showing valuation using Dividend Valuation MethodParticularsAmountcash flow £ 40.40 Discounting rate 9%Market value of shares £ 448.89 Total Market value £ 65,986.67 Table 3: Valuation using Dividend model(Source: Created by Author)d)The crucial analysis of all these methods of valuation style that is relevant for particularsituations decreases the worth of the methodologies. Price Earnings Ratio is one of the mostcommon tools for valuation technique in a business enterprise and this used by the investorswhile taking the investing decisions (Brigham 2014).
Limitations of Discounted Cash Flow Method_4

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