Explain how you would value a stock. Provide an example of a valuation of a stock based on retrieved real data. Include evidence of the retrieved data in your answer. Compare your valuation with the actual price of the stock at the designated time for your valuation.

Answer with Explanation:

There are numerous stock valuing models but here, I will use Dividend Valuation Model which is based on finding the intrinsic value of Stock which is the present value of the stock at a required rate of return. The formula to calculate Intrinsic value of stock is given as under:

P0= D0   *  (1 + g) / (ke - g)

Here

P0 is the intrinsic value of the stock

D0 is the dividend just paid

g is the growth rate

ke is the investor's required rate of return

The model doesn't holds if the company doesn't pays Dividend.

Now suppose that the Dividend just paid by Apple is $20 per stock. The anticipated growth rate of dividend is 10% and the required rate of return is at 15%.

By putting values in the above equation, we have:

P0= $20 * (1 + 10%) / (15% - 10%)

= $20 / (15% - 10%)

= $400 per share

The value of stock of Apple is $400 per share which must be its fair market value as per the Dividend Valuation Model.

As per the model, if the value of stock is higher as per dividend valuation model then we must purchase the stock as it will generate higher value and vice versa. The inherent limitation of the model is that it assumes that the dividend is growing at constant rate and is consistently paid. The main disadvantage of Dividend valuation model is that it doesn't account for political factors, economical factors, evolving business risks, technological factors, etc.

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