Stock Advisor Stock Valuation Techniques 2

Question 1

What is the 'Gordon Growth Model' (GGM) formula?

Accepted Answer

Stock Value = Dividend / (Required Return – Dividend Growth Rate)

Answer

The Gordon Growth Model values a stock as the next dividend divided by (required return minus dividend growth rate), assuming dividends grow at a constant rate in perpetuity.

Question 2

What is 'WACC' and how is it used in stock valuation?

Accepted Answer

Weighted Average Cost of Capital — used as the discount rate in DCF models to reflect the blended cost of equity and debt financing

Answer

WACC blends the cost of equity and after-tax cost of debt weighted by capital structure, and serves as the discount rate in DCF models to compute present value of future cash flows.

Question 3

What is a 'terminal value' in a DCF model?

Accepted Answer

The value of all cash flows beyond the explicit forecast period, representing the majority of DCF value

Answer

Terminal value captures the value of all cash flows beyond the explicit forecast period (usually 5–10 years), often representing 60–80% of total DCF value, calculated via perpetuity growth or exit multiple.

Question 4

What is 'price-to-sales' (P/S) ratio used for in valuation?

Accepted Answer

Valuing companies by comparing market cap to total revenue — useful when earnings are negative

Answer

The P/S ratio compares market cap to annual revenue, making it useful for valuing high-growth companies or startups with no earnings yet.

Question 5

What is a 'football field chart' in stock valuation?

Accepted Answer

A summary valuation chart showing ranges from multiple methodologies to triangulate a stock's value

Answer

A football field chart presents valuation ranges from multiple methods (DCF, comps, precedent transactions) side by side, helping analysts triangulate a reasonable value range for a stock.

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Stock Advisor Stock Valuation Techniques 2