Investment • 604 • 5
Are you are someone who wants to invest in countable blue chip company and then do nothing with the funds for at least for 5-7 years.
If yes, then how to identify such company?
Broadly there are 2 methods by which you can filter out your company from the rest:
1. Dividend Discount Model (DDM): Under this method the company future dividends are discounted to arrive at current market price. This method is only suitable when company is reliable and consistent in paying its dividends. If price as per DDM is greater than actual price, then stock is undervalued, one should buy it in such case and vice versa.
2. Discounted Cash Flow Method (DCF): When company is irregular in paying its dividend, then this method is more suitable. Under this method all future cash flows of company is discounted at cost of capital to arrive at current value of company. For calculation of free cash Flow, take operating revenue figure and subtract all capital investments from it. If value of company calculated under DCF is less than actual value, then company is undervalued and it represents an opportunity to invest in it and vice versa.
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