Using DDM and FCFF to Evaluate Stocks’ Value: Take HP as an Example

Yutong Chen ()
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Yutong Chen: Central University of Finance and Economics, Department of International Economics and Trade

A chapter in Proceedings of the 2024 2nd International Conference on Management Innovation and Economy Development (MIED 2024), 2024, pp 501-508 from Springer

Abstract: Abstract With the fast development of the global economy, the investment market has become one of the most important markets in the world. Among various investment products, equity investment stands out because of its high profitability and risks. For investors who want to earn profits from the stocks, estimating the actual value of a company’s shares and lowering the risk of uncertainty is necessary. This research presents two models to asses investors’ target companies. To show the calculations, this research takes Hewlett-Packard as an example and collects data from related websites. The discounted dividend model assumes an indefinite term of the company’s constantly growing dividend payment and discounts the predicted dividends to work out the present stock price. The free cash flow to firm model takes the data in the company’s financial reports and estimates its growing free cash flow, which will be discounted to calculate its present value. The two models indicate that Hewlett-Packard’s value is underestimated, suggesting investors take an optimistic attitude. The limitations of the models, such as strict assumptions and investors’ subjectivity, should also be noted because they may make the results inadequate. Further research can be made to optimise the two evaluating models.

Keywords: Equity Investment; Discounted Dividend Model; Free Cash Flow to Firm Method (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-542-3_58

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DOI: 10.2991/978-94-6463-542-3_58

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