Economics Homework Help
SEU Methods that Can Be Used to Determine a Stock Intrinsic Value Analysis
There are multiple methods that can be used to determine a stock’s intrinsic value. These can include utilizing such factors such as dividend streams, discounted cash flows, residual income, comparable companies’ analysis, etc. Select at least one approach and explain why you feel that is a good method for determining the intrinsic value of a stock.
Then, select a publicly traded company in Saudi Arabia, and use your selected method to determine what you consider is its intrinsic value and illustrate whether you feel the stock is underpriced, overpriced, or fairly price. (Make sure your selected company is different from your classmates’). Explain why these concepts are important to business leaders in Saudi Arabia and Saudi Vision 2030.
Search the SEU library or the Internet for an academic or industry-related article. Select an article that relates to these concepts and explain how it relates to doing business in Saudi Arabia.
For your discussion post, your first step is to summarize the article in two paragraphs, describing what you think are the most important points made by the authors (remember to use citations where appropriate). For the second step, include the reference listing with a hyperlink to the article. Do not copy the article into your post and limit your summary to two paragraphs. Let your instructor know if you have any questions and enjoy your search.
Reply:
Discounted Cash Flow (DCF)
In this case, I select discount cash flow (DCF), a valuation technique utilized to approximate an investment’s value founded on its projected impending cash flows. Additionally, the Discount Cash Flow technique aims at figuring out the worth of today’s investment based on approximations of the amount of money it will yield in the future (Laitinen, 2019). Still, it describes investors’ decisions in securities or enterprises like buying stock, purchasing a company, and managers and business owners seeking to make operational spending decisions and capital budgeting (Nie, 2018).
Furthermore, the DCF analysis aims to approximate the money an investor will acquire from an investment accustomed to the time value of money (Laitinen, 2019). For instance, the temporal value of money claims that today a dollar is worth more than it will tomorrow since it can be invested. Therefore, in any scenario where an individual is presently paying money with the likelihood of earning money in the future, DCF analysis is acceptable (Nie, 2018). An example of a publicly-traded company in Saudi is Saudi Aramco (New York Times, 2019). What I consider to be the company’s intrinsic value based on the DCF analysis is the company’s valuation of $10.13, which is a Saudi exchange of $2.03 trillion (New York Times, 2019). I feel the stock I overpriced since it is subjected to deprecation.
References
Laitinen, E. K. (2019). Discounted Cash Flow (DCF) as a Measure of Startup Financial Success.
New York Times. (2019). Saudi Arabia Insisted Aramco Was Worth $2 Trillion. Now It Is. https://www.nytimes.com/2019/12/16/business/energy-environment/saudi-aramco.html
Nie, Z. Q. (2018). Discounted cash flow (DCF) model detection based on goodwill impairment test. Journal of Discrete Mathematical Sciences and Cryptography, 21(4), 959-968.
The second
THE DISCOUNTED CASH FLOWS METHOD
The discounted cash flows is a good method for determining the intrinsic value of the stock. It is because it makes use of the company’s free cash flows and the weighted average cost of the capital (WACC). Capital funding is generated in this method by issuing debt like bonds or equity. This method is also useful because it is very detailed and precise. It consists of business assumptions and has no need to focus on comparable companies. The prospects of the business’s expectations about the future in a way to measure the performance of the mergers and acquisitions are all looked at in this method precisely (Keown et al., 2019).
Tadawul is one of the liquid stock markets in Saudi Arabia. It is, in fact, one of the most prominent stock exchanges for all publicly traded companies of Saudi Arabia. Saudi Ceramic Company uses the above technique discussed of discounted cash flow to measure the intrinsic value of the stock. It takes the expected future cash flows and discounts them to their present value. According to this method, the terminal value with a future annual growth rate being a 5-year average stands at a bond yield of 8.8%. Terminal cash flows to the present day equity stand at the cost of 15%. The intrinsic value of the stock, according to this calculation, is overpriced. As compared to 75% of the stocks traded on Tadawul, the intrinsic price of the shares of Saudi Ceramic is high. The fair value of the stock of Saudi Ceramic stands at 49.13 Saudi Riyal. The current price of the stock of Saudi Ceramic stands at 58.30 SR, and hence the value is overpriced by 18.7 SR (Al Rajhi,2019).
In light of the concepts discussed above, Saudi Arabia’s vision 2030 rightly support the interests of the local and international financial community. It is because it aims to promote economic and social stability. It aims to maintain sustainable economic growth in the Kingdom of Saudi Arabia. It aims to fulfil the aspirations of the population. Hence, in line with these notions and the fact to develop the KSA capital markets for diversifying the economy, these concepts are useful in the view of business leaders and Saudi Vision 2030 (Al Jasser,2020).
REFERENCES
Al Jasser, H. et al.(2020). Financial evaluation of Tadawul All Share Index (TASI) listed stocks using Capital Asset Pricing Model. Journal of Investment Management and Financial Innovations. Volume17. Issue 2.
Al Rajhi Capital. (2019). Saudi Ceramic. On the cusp of a turnaround.
https://argaamplus.s3.amazonaws.com/03e4bbfe-0067-41b9-9971-33eb8e6c1ea7.pdf
Keown, A. J., Martin, J. D., & J William Petty. (2019). Foundations of finance: the logic and practice of financial management. Pearson.
Reply:
The key feature of this formula lies in how its valuation method derives the value of the stock based on the difference in earnings per share and per-share book value (in this case, the security’s residual income) to arrive at the intrinsic value of the stock.
Essentially, the model seeks to find the intrinsic value of the stock by adding its current per-share book value with its discounted residual income (which can either lessen the book value or increase it).
Then Doctor replay:
Thank you for your initial response! Your response exhibits a good understanding of information. After reading your response, can you please, compare your response to Hani’s post? Are you both saying the same thing? Why or why not?
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