Even though the operating performance of Innovative Chemical Corporation (ICC) has been outstanding, there are some problems in respect of the share price appreciation. Firstly, P/E ratio will be used to evaluate the company’s stock and factors which affect company’s P/E ratio will be listed. Furthermore, discounted dividend valuation model will be demonstrated and fundamental factors which impact the share pricing will be analysed. Finally, the value of ICC at 30 June 2010 will be calculated using P/E ratio and DDM model. Meantime, the weakness of those two models will be illustrated, and alternative methodology will be applied to calculate the intrinsic valuation of ICC and then compare …show more content…
b) If the stock does not currently pay a dividend, like many growth stocks, more general versions of the discounted dividend model must be used to value the stock. One common technique is to assume that the Miller-Modigliani hypothesis of dividend irrelevance is true, and therefore replace the stock’s dividend D with E earnings per share.
But this has the effect of double counting the earnings. The model's equation recognizes the trade-off between paying dividends and the growth realized by reinvested earnings. It incorporates both factors. By replacing the (lack of) dividend with earnings, and multiplying by the growth from those earnings, you double count. c) The Gordon model will result in the stock price which is sensitive to the growth rate chosen.
4 c alternative methodology and compare Using the PCF model, PCF ratio is the ratio between the share price and cash flow per share, which is used to evaluate the share price level and risk level. The ratio is smaller, the cash flow per share will increase, and the operating pressure is less. According to PCF ratio formula, we can find out the intrinsic value for ICC at 30 June in 2010 is $25.05519851 which is lower than the share price at the same time. We also can use internal rate of return model (IRR).
To sum up, the company has a lot of problems as above stated.
P=D1/k-g or P=D0* (1+g)/k-g
P/E=share price/ EPS