The valuation model used by Lisa is the Corporate Valuation Model by which the company is values in terms of the present value of its free cash flows. Through this model the valuation of the company involves finding the market value by determining the present value of the company’s future FCFs. The market value is then subtracted form the debt of the company to come to the market value of the common stock for the company. The market valued common stock of the company is then divided by the outstanding shares to arrive at the stock price. This model is usually preferred to other models like dividend growth as it provides an estimate even when the dividend payout is unavailable or cannot be forecasted.
The price ratio model that is being considered by Dan is the approach by which the value of the company is determined by comparing the market value and the original value of the firm. The high value is taken as the value of the company which usually is the market value as this provides the most realist up to date valuation of the company. This approach is very easy to use however the main disadvantage of the approach is that there is very little information content and risk is not accounted for.
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