DDM, DCF and Comparable company multiples should always give the same valuation result if applied correctly.

Video: 2.3.H. P44-45 (Info competition & Stock Price, Summary)

Question

DDM, DCF and Comparable company multiples should always give the same valuation result if applied correctly.

Video: 2.3.H. P44-45 (Info competition & Stock Price, Summary)

BlackTom AI · Accepted Answer

In evaluating any claim about valuation methods, it's important to consider the nature of each approach and how they behave in practice.
Option 1: True. If one assumed perfect conditions and exact inputs, one might think DDM (discounted dividend model), DCF (discounted cash flow) and comparable company multiples would align. However, this overlooks the fundamental differences in what each method measures, the assumptions embedded, and the data requirements they rely on. DDM focuses on dividends or dividends per share, DCF projects free cash flows and terminal value, and multiples derive value from current market pricing of peers. These are distinct valuation paradigms, so even with rigorous inputs they can yield different values.
Option 2: False. This statement asserts that the three frameworks should always converge when applied correctly. The key flaw in this assertion is that “applied correctly” does not negate the structural dissimilarities among the methods. Each approach uses different cash flow concepts, growth assumptions, risk adjustments, and treatment of capital structure. As a result, even with careful modeling, discrepancies naturally arise across DDM, DCF, and multiples due to divergent benchmarks and valuation philosophies.
Further considerations: In practice, analysts may obtain somewhat similar results under certain scenarios (e.g., stable, predictable cash flows and similar risk profiles), but this is not guaranteed and is not a universal rule. The presence of different terminal value formulations, varying discount rates, and the use (or non-use) of leverage can lead to divergent outcomes. Recognizing these differences helps avoid overreliance on a single method.
Thus, the statement that all three methods should always produce the same valuation is an oversimplification and not consistent with how these tools behave across real-world contexts.

FINANCE 351 Quiz 4 Business Valuation

DDM, DCF and Comparable company multiples should always give the same valuation result if applied correctly. Video: 2.3.H. P44-45 (Info competition & Stock Price, Summary)

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