Managerial Finance: Comparing Stock Valuation Methods and Investment

This managerial finance report delves into various stock valuation methodologies to identify the most viable investment strategies. The analysis includes calculating stock values using the dividend discount model (DDM), P/E ratio valuation model, and comparing investment desirability based on these valuations. The report examines the application of these methods on various companies, including REA Group, Woodside Petroleum, and Commonwealth Bank. Furthermore, it researches and summarizes Warren Buffett's value investing approach, focusing on his two-column valuation method and the concept of intrinsic value. The report compares Buffett's approach with the DDM and value of ordinary share methods, recommending Buffett's methodology for its emphasis on intrinsic value, EPS, dividends, and price-to-book ratio. Data from financial reports and Reuters is used to support the valuation models, providing a comprehensive overview of investment decision-making.

Running head: MANAGERIAL FINANCE
Managerial Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Introduction:...............................................................................................................................2
Task 1:........................................................................................................................................2
1. Calculating value of the stock in accordance with the required rate of return from
investment:.................................................................................................................................2
2. Tanking the investment in order of desirability:....................................................................3
3. Selecting the stock for investment and providing relevant reasons for the investment:........4
Task 2:........................................................................................................................................5
Researching and summarising some interesting facts about Warren Buffet share valuation
method:.......................................................................................................................................5
Task 3:........................................................................................................................................6
Comparing the Warren Buffet’s approach to share valuation and share valuation methodology
and recommending one approach for investment:.....................................................................6
Conclusion:................................................................................................................................8
Reference and Bibliography:......................................................................................................9
Appendices:..............................................................................................................................11

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Introduction:
The overall assessment focuses on identifying the most viable valuation method,
which could be used by the investor in detecting the actual value of the stock. In addition,
viability of the calculations such as dividend discount model, value of ordinary share and
Warren Buffet valuation method is conducted to understand the significance of valuation
method. Moreover, the Warren Buffet valuation method is evaluated to understand the
implication of intrinsic value and how it might help in generating high level of returns from
investment.
Task 1:
1. Calculating value of the stock in accordance with the required rate of return from
investment:
Valuation Formula
P/E Valuation Model P/E ratio * [EPS *(1+G)]
Expected rate of return Risk Free rate + Beta * (Market Return -Risk Free rate)
Growth rate (1 – Dividend Pay-out Ratio) * Return on Equity
DDM Value of Stock (Recent Dividend * (1 + Growth rate)) / (Expected rate
of return – Growth rate)
Shares Value as per DDM Current price P/E ratio
REA Group $61.96 $88.71 $119.33
Woodside petroleum $11.42 $33.52 $33.19
Westpac Banking Corp $16.31 $30.01 $31.09

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ANZ banking group limited $15.20 $27.56 $27.62
New Hope Corporation $0.77 $2.45 $2.32
Z Energy Limited $8.54 $6.88 $6.53
Soul Pattinson (W.H) $24.57 $19.76 $19.55
Computershare Limited $22.68 $17.63 $19.84
Commonwealth bank $78.96 $70.74 $70.95
Link Group $266.91 $6.98 $5.49
2. Tanking the investment in order of desirability:
Refer to appendix 1
From the overall evaluation of the above table, the ranking is mainly based on the
share valuations as per dividend discount model and current share price of the organisation.
The highest difference in value that will be achieved by the valuation is ranked 1, while the
reduction in the overall return is ranked accordingly. The valuation of P/E ratio relevantly
indicates the price changes on the perception of future EPS, which is established by
identifying he growth rate in EPS. In addition, from the overall calculation it could be
identified that Link Group is understood to be the most viable investment opportunity, which
could help in generating high level of returns from investment. Due to the low accuracy of
EPS valuation the overall ranking is based on Dividend Discount Model. This ranking
relevantly depicts desirability of investors to invest in the company based on the return that
will be generated from future predicted price. The stock having highest loss from the
theoretical derivation is ranked last, which is REA Group. This desirability factors indicates
the willingness of the investors to invest in the company to generate high level of return from
investment. In this context, Asness et al., (2015) stated that with the help of dividend discount

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model investors can identify the future price of stock, which could be used in making
adequate investment decisions.
The risk-free rate and market return is calculated rom Bloomberg, while the dividends
of each company are detected from their annual report. The market return is calculated for
One year and All Ordinary Index of Australia is taken into consideration. DDM value is
calculated as per the annual report of 2017 of each organisation.
3. Selecting the stock for investment and providing relevant reasons for the investment:
From the valuation it could be identified that companies ranking from 1 to 5 can be
used for investment purposes for improving the level of profits from investment. The first 5
ranked companies relevantly provide the highest rate of return from investment, which could
be used for investment purposes and generate high rate of return from investment according
to the dividend discount model. The overall recommendation is not based on P/E ratio, as the
calculation does not project the accurate valuation of stock over period of time. Therefore,
with the use of dividend discount model, ranking of the stock is conducted to identify the
stock, which could generate highest return from investment. The main purpose of selecting
Link Group, Commonwealth bank, Computershare Limited, Soul Pattinson (W.H), and Z
Energy Limited Foreign Exempt NZX is to maximise the profits from investment, as share
price of other stock will decline in future, as evaluated from the dividend discount model
(Chandra, 2017).

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Task 2:
Researching and summarising some interesting facts about Warren Buffet share
valuation method:
Warren Buffet uses value investing as its trading measure for conducting relevant
investments in the capital market and create an adequate portfolio. In addition, Warren Buffet
uses the two-column valuation method for detecting the financial viability of relevant
investments, which could generate higher rate of return. This valuation method was mainly
identified by evaluating different level of returns, which could be generated from investment.
This two-column valuation method would eventually help in understanding the level of share
value by identifying their intrinsic value, while detecting its share value. The two-column
measure relevantly uses the value of after tax net income to detect the intrinsic value of the
current share price valuation of the organisation. Moreover, Warren Buffet model relevantly
uses the sustainable growth rate to identify future profits of the stock and how it could
improve the level of returns from investment. the use of earnings per share, book value per
share and dividend per share for calculating the future price of the stock (Bowen, Rajgopal &
Venkatachalam, 2014).
In addition, Warren Buffet model relevantly utilises the overall intrinsic value by
evaluating the net profits that is generated by the company, while identifying the changes in
future share price. Moreover, the two-column valuation method used by Warren Buffet
mainly allows the investor to identify the stock, which has future value and are traded lower
than the book price. The investors mainly need to value performance of the organisation
based on intrinsic value and sustainable growth value to identify the future performance of
the organisation. The companies used in the assessment can be evaluated according to the
Warren Buffet valuation model for deriving the actual value of stocks. In this context, Lu

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(2016) stated that with Warren Buffet model investor can identify stocks, which could
generate high rate of return from investment by evaluating its intrinsic value.
Task 3:
Comparing the Warren Buffet’s approach to share valuation and share valuation
methodology and recommending one approach for investment:
Refer to appendix 2
The above table relevantly indicates the overall price of stock according to Warren
Buffet model, Value of ordinary share and Dividend discount model. The above table
relevantly compares the future price of the stock based on Dividend Discount Model, , Value
of ordinary share and Warren Buffet valuation model. In addition, the calculation directly
indicates that valuation done based on Warren Buffet valuation model provides a more
justifiable price action of the stock in future, as comparted to the valuation conducted by
Dividend Discount Model. The price fluctuation measured in Dividend Discount Model is
relevantly high, as it is affected by dividends, required rate of return and growth rate, while
the price depiction in Value of ordinary share is relevantly in growth rate basis. On the other
hand, the Warren Buffet valuation model is only focussed on the intrinsic value and it
discounts share price with the help of price-to-book value, earnings per share and dividends
for identifying the sustainable share price value of the company over the period of time. The
highest share value according to Warren Buffet valuation model is Commonwealth bank with
a total value of $241.04, while the Dividend Discount Model valuation depicts a value of $
78.96 and share price according to Value of ordinary share is $70.95. The difference in price
valuation is due to investment methodology adopted by the valuation method. This price of
Commonwealth bank has relevantly improved over time were the dividends increased with

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the EPS and price-to book value. However, the Dividend Discount Model was only able to
evaluate the prices on the basis required rate of return and dividends. Li, Wang & Dong
(2016) stated that the major vulnerabilities of CAPM model is its single measuring factor,
which cannot comprehend the different level of factors affecting prices of the organisation.
In addition, the share valuation methodology of Warren Buffet is to value the stock on
the basis of intrinsic value and price-to-book value. This relevantly allowed the investors to
maximize the level of returns that could be generated form investment. In addition, the
Warren Buffet model also evaluates EPS, dividend paid, high value and low value of the
stock during the period for identifying the sustainable growth value of the stock, which could
be obtained in future. On the other hand, the dividend discount model valuation directly
focuses on the growth rate, CAPM rate of return and dividend provided by the organisation.
This valuation is dependent on the required rate of return, which is provided by the CAPM
results. The Dividend Discount Model focuses on deriving the price of stock based on
dividends, required rate of return and growth (Hou, Xue & Zhang, 2015). The data such as
EPS, DPS, BVPS is detected from Reuters, which provides viability data of the organisations.
The data from 2017 to 2010 is taken into consideration for calculating the share price
according to Warren Buffet Valuation Model.
There is significant different between the methodology of Dividend Discount Model,
Value of ordinary share and Warren Buffet valuation method, as the valuation method use
different set of input to derive the actual valuation of the stock. Therefore, from evaluation it
could be identified that investors could benefit from value investing with the help of Warren
Buffet Valuation Method, as it evaluates the performance based on intrinsic value.

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Conclusion:
From the overall evaluation it could be identified that Warren Buffet valuation
method is the most viable investing techniques, which could be used by investors in
improving the level of returns from investment. In addition, the valuation also indicates that
the using the Warren Buffet valuation method is essential, as it uses intrinsic value, EPS,
dividends, and Price-to-book ratio for determining the actual valuation of the organisation.
This method is not used by Dividend Discount Model and Value of Ordinary share model,
while deriving share price valuation of the organisation. Hence, from the evaluation of above
valuation it could be identified that Warren Buffet valuation method is the most viable
investment option for investors.

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Reference and Bibliography:
Asness, C. S., Frazzini, A., Israel, R., & Moskowitz, T. J. (2015). Fact, fiction, and value
investing.
Asx.com.au. (2011). Asx.com.au. Retrieved 14 May 2018, from
https://www.asx.com.au/asx/research/listedCompanies.do
Au.finance.yahoo.com. (2018). Au.finance.yahoo.com. Retrieved 14 May 2018, from
https://au.finance.yahoo.com/
Bloomberg.com. (2018). Bloomberg.com. Retrieved 14 May 2018, from
https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia
Bowen, R. M., Rajgopal, S., & Venkatachalam, M. (2014). Is Warren Buffett's Commentary
on Accounting, Governance, and Investing Practices Reflected in the Investment
Decisions and Subsequent Influence of Berkshire Hathaway?. The Accounting
Review, 89(5), 1609-1644.
Chandra, P. (2017). Investment analysis and portfolio management. McGraw-Hill Education.
Guragai, B., & Peabody, S. D. (2018). Demographic Factors Affecting US Households’
Investment in Stocks. International Journal of Economics and Finance, 10(4), 112.
Hou, K., Xue, C., & Zhang, L. (2015). Digesting anomalies: An investment approach. The
Review of Financial Studies, 28(3), 650-705.
Li, Z., Wang, F., & Dong, X. (2016). Are all investment decisions to subscribe to new stocks
mindless?: Investor heterogeneity and behavior in the process of subscribing to new
stocks. China Journal of Accounting Research, 9(4), 283-304.

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Lu, Y. (2016). Inside the Investments of Warren Buffett: Twenty Cases. Columbia University
Press.
Rationalwalk.com. (2009). The Rational Walk. Retrieved 14 May 2018, from
http://www.rationalwalk.com/?p=281
Reuters.com. (2018). Breaking News, Business News, Financial and Investing News & More
| Reuters.co.uk. U.K.. Retrieved 14 May 2018, from https://www.reuters.com/