The intrinsic value of the company

Running head: DDM
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Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
Company Profile:...................................................................................................................3
Suitability of the company for DDM:....................................................................................4
Types of DDM:......................................................................................................................4
Model for the Valuation of the Company:.............................................................................6
Derivation of Dividend Growth Rate:....................................................................................7
Calculation of Required Return:............................................................................................9
Intrinsic Value of the company:...........................................................................................11
Constant Growth Rate of Dividend:.................................................................................11
H – Model:.......................................................................................................................12
Investment Recommendation:..............................................................................................12
Conclusion:..............................................................................................................................13
References:...............................................................................................................................14

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Introduction:
The value of the company is measured by the price of the shares which is trading at
the market or the stock exchange. This represents the value which has been given by the
investors to the company depending on the business prospects of the company and by also
considering the future business opportunity of the company. However, the share price of the
company which is trading at the stock market depends on the demand supply factor and is
affected by the financial news which affects the price of the stock at the exchange (Thomas
2017).
The method to determine the value at which the shares of the company should be
trading at the market taking into consideration all the factors which might affect the value of
the company and its business prospects is known as intrinsic value of the company. The
intrinsic value of the company is calculated either by absolute valuation or relative valuation
of measurement of equity value. The absolute valuation means considering the cash flows
which can be generated from the projects which is being operated by the business which can
be measured by the free cash flow valuation method. Another method of valuation of the
share price is by using the dividend discount model, which considers the dividend which is
being paid by the company to the shareholders and discounts it to measure the share price of
the company. The relative valuation can be done by taking the multiples of the company and
comparing with the industry averages and calculating the should be price or the intrinsic
value of the shares. Also comparable company valuation can also be used to calculate the
share price of the company which should be the intrinsic value of the company (Gacus and
Hinlo 2018).
The aim of this report is to use the absolute method of equity valuation to calculate
the intrinsic value of the company. The method which is used for the calculation of the

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intrinsic value is the dividend discount model and the company which is analysed is the
British American Tobacco. The company is listed in the FTSE Stock exchange and has been
paying dividends over 20 years.
The report tends to provide the rational for the use of dividend discount model and the
properties of this model in equity valuation. The various assumptions and estimates which are
used in the valuation of the company is also provided in the report.
Discussion:
Company Profile:
The company which is being analysed in this report is British American Tobacco
which is a leading company around the globe which provides and develops various products
made from Tobacco. The company is listed in the FTSE 100 index and has its business
operations which is from 1902. The company provides its goods to almost all the 6 continents
around the globe and employs 53000 individuals directly or indirectly.
The company is successful for its product which is cigarettes and has a portfolio of
some of the best brands which are consumed around the globe. The brands Dun Hill, Pall
Mall , Lucky Strike and Kent belongs to the company British American Tobacco and is the
second largest company in the tobacco industry around the globe. The company has changed
its business strategy to manufacture less harmful products than cigarettes but provides the
same level of satisfaction to the consumers. Thus the company has invested billions of dollars
in its research division for the new products which carry significant potential in the future.
The existing products of the company have a base of consumer’s loyalty which
provides a stable revenue for the company which the company would expand with its new
products. Thus upon analysing the business model of the company it seemed to be a matured