Dividend Discount Model (DDM), Discounted Cash Flo- 123docz.net

The DCF models calculate the value of a business using its future benefits which will generate by the owners. Earnings are forecast from a historical performance base in some number of future years, usually five to ten years and then discounted

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back to present using a discount factor specifically for that business (Damodaran, 2002).

Damodaran (2002) defines free cash flow (FCF) as a net income after reinvestments and net debt payments that is a net cash flow available to equity holders. FCF importance arises from the fact that FCF potentially represents cash flows that should be paid to investors in terms of dividends. Because net income is often manipulated by different accounting procedures, Damodaran discusses ways to adjust operating income, with emphasis given to adjusting for and amortization of operating leases, managed earnings, and long-term expenses.

Damodaran also cited two approaches to calculate terminal value using in DCF models: liquidation value and stable growth value. When the liquidation value approach is used, it is assumed that a company will cease its existence and its assets will be sold at market prices at a given point of time. Under the stable growth approach it is assumed that a company will grow forever at a constant rate, and Gordon’s stock valuation formula is utilized to find a company’s worth.

The mainly problem of using the DCF model has identified two areas that are important when conducting a valuation, (1) How to limit the subjectivity of the assumptions and estimations behind the valuation, and, (2) How to make an accurate forecast of the future sales revenue.

Summary of Chapter 1

Based on generalization about concepts of value, price and assessment of stock as well as the role and significance of stock price assessment for individual participating in the stock market, this chapter presents basic principles that need to take into consideration about stock price assessment.

That is the basis of common stock price assessment methods that widely use in the world presented in the following chapters. These methods also have advantages and disadvantages and basically originated from enterprise assessment systems that have specific characteristic of stock. In the next chapter, there will be a briefing about valuation practice in Vietnam, laws and regulation that closely related to valuation methods and a study case of SAM stock with different calculation models will be applied to find out the differences of each.

Dividend Discount Model (DDM), Discounted Cash Flow (DCF)

Pros and cons of valuation methods in Vietnam