Introduction
In the modern economy and investment analytics, two methods of stock estimation are used more and more often – the assessment of dividend discounted and the discounted monetary model. Both models differ in the principles for stock valuation and yield different results. In practice, both models are used to understand the actual value of shares better.
Dividend Discount Model
The valuation of the discounted dividends suggests that shareholders prefer to receive cash dividends rather than invest them in the company’s shares. Therefore, it is essential to have information on rewards, data on the number of shares, and modeling of dividend forecasts to use this model. This model assumes that dividends are constant. Based on this assumption, dividends are discounted, and the stock’s long-term value is obtained.
Discounted Monetary Model
The discounted monetary model assumes that shareholders prefer to receive cash flows in the future rather than cash dividends. To use this model, it is necessary to provide the cash flows that may flow to shareholders in the future (Espinoza et al., 2020). It is possible to obtain a long-term share value based on cash flows to shareholders and their discounting.
Comparison
The results of the two share valuation models may differ due to differences in assumptions implicit in the models themselves and assumptions made in their application. For example, the results of discounting dividends depend on the level of tips, and the results of the discounted monetary model rely on the projected cash flows (Espinoza et al., 2020). Moreover, the estimates for both models may differ because of differences in the degree of discounting and the money flow and dividend forecasting points.
Conclusion
In conclusion, the two valuation methods may yield different results. However, since these methods’ accuracy depends on the assumptions and assumptions made in their application, the estimates obtained both ways will be the most reliable. This will allow a more accurate representation of the absolute value of the shares before the annual shareholder meeting.
Reference
Espinoza, D., Morris, J., Baroud, H., Bisogno, M., Cifuentes, A., Gentzoglanis, A., Luccioni, L., Rojo, J. R., & Vahedifard, F. (2020). The role of traditional discounted cash flows in the tragedy of the horizon: Another inconvenient truth. Mitigation and Adaptation Strategies for Global Change, 25(4), 643–660. Web.