Dividend Discount Model

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The aim of this paper was to value InvoCare Limited using five different approaches to valuation namely, the Dividend Discount Model, The Cash Flow Valuation Model, the Price Earnings ratio, the Price-to-Book ratio and the Net tangible asset backing model. The study began by analysing some background information concerning the global economy, the Macroeconomic environment in Australia as well as a General overview of InvoCare Limited. A valuation based on each of the above models was presented.

The results show that the value provided by 3 of the models the Dividend discount model, the cash flow model and the Net tangible asset backing model are less that that predicted by the capital market, which imply that capital markets are inefficient and that the stock is overpriced thus recommending a sell decision.. On the other hand the P/E ratio and the P/B ratio provided values higher than that predicted by capital markets implying that the stock is under-priced thus implying a buy and hold decision.

However, we conclude that the P/E ratio and the P/B ratio were the most plausible models in valuing the firm since they are based on expected future earnings of the company. 1. Introduction. Globalisation, the new information technology, and deregulation of financial markets has eased the provision and search of finance. Millions of shares are traded every day on the world’s stock markets. (Penman, 2003). Investors who trade on these stocks are often forced to ask themselves whether they are buying or selling at the right price.

(Penman, 2003). They often attempt to provide answers to these questions by turning to various media including internet chat rooms, printed press, “talking heads” on television and financial networks, who often voice opinions on what they feel the stock prices should be. (Penman, 2003). In addition, investors consult investment analysts who provide an almost endless stream of information and recommendations to sort out. There are often claims that some shares are undervalued and vice versa. (Penman, 2003).

This information at times becomes confusing leaving the investor with no clear indication of what the true prices of stocks should be. (Penman, 2003). Under such circumstances, the investor is forced to make the investment decision following his/her instinct or based on the information provided by the market. (Penman, 2003). Investors who make the decision based on instinct are referred to as intuitive investors while those who make investment decisions based on capital market efficiency are referred to as passive investors. (Penman, 2003).

Passive investors carry out their investment decisions based on the assumption that the market price is a fair price for the risk taken, that is, that market forces have driven the price to the appropriate point. (Penman, 2003). These investment mechanisms appear to be very simple, as they do not require much effort. (Penman, 2003: pp 3). However, both investors run risks that are even more than the risks of the firms they are investing in since they can either pay too much or sell for less and as a result suffer a decrease in returns on their investments.

(Penman, 2003). According to Penman (2003), the intuitive investor has the problem of the intuitive bridge builder: “one may be pleased with one’s intuition but, before building gets underway, it might pay to check that intuition against the calculations prescribed by modern engineering as not doing so may lead to disaster”. (Penman, 2003: pp 3). The passive investor runs the risks of either paying too much or selling for less should stocks be mispriced.

(Penman, 2003). Although economic and modern finance theory (Bodie et al, 2002; Penman, 2003) predicts that capital markets are perfect it is good practice to check before taking action. (Penman, 2003). Therefore, both the passive and intuitive investor run the risk of trading with someone who has done his homework well, that is, someone who has analysed the information thoroughly. (Penman, 2003). The aim of this paper is to presents a valuation of InvoCare Limited.

It is good practice that when carrying out investment analysis and valuation of a company, both internal and external information concerning the company should be analysed. In this light, we will begin the analysis by presenting some general information about the global economic environment since such information is important for both the company’s competitiveness in the global context, next we present information concerning the Australian Macroeconomic environment.

This too has an important role to play on the company’s profitability and future growth prospects. After carrying out a macroeconomic analysis, we will analyse the funeral industry in Australia. Next the study will carry out valuations for InvoCare using different valuation techniques. A comparison will be carried out and the end to see the relative strengths and weaknesses of each technique in measuring the true value of the firm.

Section 2 presents a picture of the global economic environment, in section 3; a discussion of the current macroeconomic environment in Australia is presented. Section 4 presents an analysis of the funeral industry in Australia. Section 5 presents an overview of InvoCare Limited, including its history, mission, products, competitors, strategy and future prospects. Section 6 gives the different valuations including the dividend growth valuation, the Cash flow valuation, the price earnings valuation and the

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