From the course: Finance Foundations: Business Valuation
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Compare the valuation models
From the course: Finance Foundations: Business Valuation
Compare the valuation models
- The computer prices for McDonald's shares at the end of 2011, using each of the four models are as follows. Model one, the constant future dividends, $16.87. Model two constant dividend growth, $70.21. Model three, using the price earnings multiple $105.93 and model four, the discount of free cash flow, $35.29. Now the actual market price of a share of McDonald's stock at the end of 2011 was $98.86. This valuation exercise should leave you feeling dissatisfied for two reasons. First, our estimates are all over the map, ranging from 16.87 per share to one Oh 5.93 per share. Second, except for the price earnings multiple model, our estimate devalues are not even close to the actual $98.86 value of McDonald's shares at the end of 2011. You should come away from this simple valuation exercise with the following three lessons. One, equity valuation is difficult. Proper use of the price earnings multiple model would involve…
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