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Business Valuation Limitation: Dividend Discount Model and Free Cash Flow model

In: Proceedings of the International Workshop on Navigating the Digital Business Frontier for Sustainable Financial Innovation (ICDEBA 2024)

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  • Chen Eric Zhang

    (Beijing New Oriental Foreign Language School at Yangzhou, Guangling District)

Abstract

Valuation plays a crucial role in investment activity, especially for investors seeking profits in the stock market. Accurate business valuation is key to decision-making. Business valuation methods provide essential data to guide investment decisions by evaluating whether the stock is overestimated or underestimated. This research paper introduced two methods, the DDM (dividend discount model) and FCFF (free cash flow to the firm) model, to help with the firm’s valuation. A real-life example is the Shandong Hi-speed Company, which was selected to show the use of business methods. The outcome of the case study shows significant issues with these two business valuation methods. The cost of capital, cash flow growth rate and the future forecast are the main issues with these valuation methods. This research will help investors make investment decisions and avoid investment loss. The investors will benefit from this research by knowing how to use these two business methods to value the stock and will also benefit from knowing the limitations of the business valuation methods.

Suggested Citation

  • Chen Eric Zhang, 2025. "Business Valuation Limitation: Dividend Discount Model and Free Cash Flow model," Advances in Economics, Business and Management Research, in: Junfeng Lu (ed.), Proceedings of the International Workshop on Navigating the Digital Business Frontier for Sustainable Financial Innovation (ICDEBA 2024), pages 436-443, Springer.
    • Handle: RePEc:spr:advbcp:978-94-6463-652-9_46
    DOI: 10.2991/978-94-6463-652-9_46
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