Answer 1
Dividend discount model is used to value stocks based on the net present value of future dividends. For all present and future investors, the stream of future dividends are the cash flows it expects to receive on the investment and therefore the value of a share of its stock must be established as the present value of the expected dividend stream. This is determined using below formula,
(P = D / r – g)
The variables are P = current stock price, D is the value of next year’s dividends, r is the constant cost of equity capital and g is the constant growth rate in perpetuity expected for the dividends.
The free cash flow (FCF) valuation on the other hand is determining the value of the stock based on the present value of expected future free cash flows. Free Cash Flows is defined as Net Operating Profit after Tax less Net new investment in operating capital. The FCF is discounted using the Weighted Average Cost of Capital.
Even if the company is paying steady dividends and would be more efficient to use the dividend discount model in valuing stock, most Analyst today uses the free cash flow model. The process of projecting future financial statements can reveal quite a bit about the company’s operations and financing needs. Such analysis can provide insights into actions that might be taken to increase the company’s value. (Eugene F. Brigham, 2004)

Answer 2
Market value ratios relates the firm’s stock price to its earnings, book value per share. These ratios provide an indication of what investors think of the company’s past performance and prospects, hence market analysts include these in their valuation work.
The price/earnings (P/E) ratio shows how much investors are willing to pay per dollar of reported profits. Price/earnings multiple of 18 means strong growth prospects compared to multiple of 10 which suggest a riskier firm relative to the company with a P/E multiple of 18.
The price/book ratio gives another indication of how investors regard the company. A price/book ratio exceeding 1 indicates that investors are willing to pay more for stocks than their accounting book value. In other words, a price/book of 3 suggest that the market price is 3x higher than book value. Successful firms achieve high rates of return on their assets, causing their market

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