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Business Valuation: A study of the accuracy of the free cash flow to equity approach and the dividend discount model
Jönköping University, Jönköping International Business School, JIBS, Business Administration.
Jönköping University, Jönköping International Business School, JIBS, Business Administration.
2019 (English)Independent thesis Advanced level (degree of Master (One Year)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

Background: In an inefficient market, the intrinsic value of an asset may not be equal to

its true market value. Therefore, before engaging in a stock transaction, both the seller

and the buyer would want to know the intrinsic value of the stock as neither would want

to lose money during the process. An effective valuation model enabling investors to

efficiently determine firm values is therefore considered to be a crucial factor.

Purpose: The purpose of this thesis is to analyze the free cash flow to equity (FCFE)

approach and the dividend discount model (DDM) on 30 Swedish companies. This to

conclude if they are considered to be accurate valuation models and to determine if one

of the methods gives a more accurate estimation of the companies’ share prices than the

other. Additionally, the report will examine if one model is preferred for a specific sector

and if a payout ratio exists where the DDM generates a particularly realistic valuation.

Method: A database will be produced to estimate share prices for each company using

both the FCFE approach and the DDM over five consecutive years. The accuracy of the

models will be evaluated by dividing the projected share prices with their corresponding

actual stock prices to calculate the percentage deviations. The smaller the percentage

deviation, the more accurate is the estimated share price considered to be.

Conclusion: It is evident from the findings of this thesis that the FCFE approach and the

DDM produce accurate valuations for Swedish companies. It is difficult to determine that

one is preferred over the other altogether, instead the FCFE approach is preferred in some

cases and the DDM in others. This depends on the companies’ actual stock prices, which

industry the companies operate in and the amount the companies are assumed to pay out

as dividends.

Place, publisher, year, edition, pages
2019. , p. 88
Keywords [en]
Stock Valuation, Discounted Cash Flow, Free Cash Flow to Equity, Dividend Discount Model, Accuracy of Valuation Models
National Category
Business Administration
Identifiers
URN: urn:nbn:se:hj:diva-43883ISRN: JU-IHH-FÖA-2-20190790OAI: oai:DiVA.org:hj-43883DiVA, id: diva2:1319306
Subject / course
JIBS, Business Administration
Supervisors
Examiners
Available from: 2019-06-13 Created: 2019-05-30 Last updated: 2019-06-13Bibliographically approved

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