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Purpose:This thesis is examining two of the most common valuation methods put into practice on firms of different sizes in order to see if the market capitalization has any impact on said valuations. Relevance: Despite the widespread use of the intrinsic valuation methods both in academia and the professional world the amount of coverage concerning real life usage and analysis seems to be somewhat lacking. The numerous studies that cover the pros and cons of different valuation models and their supposed accuracy towards current stock prices. The studies rarely try to analyze whether or not the invisible hand of the market treats the firms differently depending on the market capitalization. Method: In this thesis the Free Cash Flow to Equity and Dividend Discount Model have been applied to 10 different firms of different sizes. The 10 firms were from a market capitalization perspective viewed as  5 “large”  and 5 “small”. For comparison matter, for each of the “large”  firms there was one corresponding “small” firm that operates in a similar line of business. The future growth projections were based on historical data and for the discount rate the Capital Asset Pricing Model (CAPM) was used. Conclusion: The two valuation models showed remarkably similar results, even when applied to firms of greatly different market capitalizations. Within the constraints and delimitations of this thesis, the conclusion is that according to Free Cash Flow to Equity model and Dividend Discount Model models the market does not value the firms differently with regards to market capitalization. In fact the divergencies in terms of absolute numbers of the valuations as a whole only show a 1% percentage unit difference in the Dividend Discount Model and a 2% percentage unit of difference in the Free Cash Flow to Equity model between the large and small cap segments.

Background: In an inefficient market, the intrinsic value of an asset may not be equal to its true market value. Therefore, before engaging in a stock transaction, both the seller and the buyer would want to know the intrinsic value of the stock as neither would want to lose money during the process. An effective valuation model enabling investors to efficiently determine firm values is therefore considered to be a crucial factor. Purpose: The purpose of this thesis is to analyze the free cash flow to equity (FCFE) approach and the dividend discount model (DDM) on 30 Swedish companies. This to conclude if they are considered to be accurate valuation models and to determine if one of the methods gives a more accurate estimation of the companies’ share prices than the other. Additionally, the report will examine if one model is preferred for a specific sector and if a payout ratio exists where the DDM generates a particularly realistic valuation. Method: A database will be produced to estimate share prices for each company using both the FCFE approach and the DDM over five consecutive years. The accuracy of the models will be evaluated by dividing the projected share prices with their corresponding actual stock prices to calculate the percentage deviations. The smaller the percentage deviation, the more accurate is the estimated share price considered to be. Conclusion: It is evident from the findings of this thesis that the FCFE approach and the DDM produce accurate valuations for Swedish companies. It is difficult to determine that one is preferred over the other altogether, instead the FCFE approach is preferred in some cases and the DDM in others. This depends on the companies’ actual stock prices, which industry the companies operate in and the amount the companies are assumed to pay out as dividends.

The objective of diploma thesis is about to define a value of a international group AAA Auto Group N. V. which operates on the czech, slovak and russian market with used cars and analysis of an ability to increase shareholder's value in the future. It is structured as an expert opinion. It defines purpose, subject and exact date of valuation, valuation method's overview, strategic (macro and micro) and financial group analysis on the main markets. Consolidated financial plan was created as a prediction with a quick financial analysis. Group was evaluated by three discounted-based method - free cash flow to firm, free cash flow to equity, discounted economic value added as they were compared to market capitalization method. Final group value AAA Auto Group N. V. to 7th of December 2012 was defined by free cash flow to equity method and compared to market capitalization method, which is determined by the market.

Segundo a teoria da firma, uma empresa é um nexo de relações contratuais entre os seus diversos participantes. Nessas relações contratuais, que não são perfeitas, surgem os problemas de agência, decorridos da assimetria informacional e dos conflitos de interesses entre o contratado e o contratante, no caso, agente e principal. Neste caso, quando se tem a intenção de alinhar os interesses entre eles, aparece a governança corporativa, atuando como um meio de minimizar os conflitos e diferenças existentes e corrigir as falhas presentes no processo de comunicação e informação das firmas. No Brasil, diante da fraca proteção legal aos acionistas minoritários, da alta concentração de propriedade nas empresas e da separação dos acionistas entre ordinários e preferenciais, algumas medidas institucionais e governamentais têm sido tomadas ao longo dos anos com o objetivo de contribuir com a evolução das práticas de governança corporativa no país. Uma dessas iniciativas foi a criação em 2000 do segmento Novo Mercado pela Bovespa, composto por regras e exigências crescentes em relação às boas práticas de governança. Nesse sentido, é coerente pensar que a política de dividendos, antes influenciada pela necessidade de atuar também como instrumento de redução de conflitos entre os acionistas, passou a ser decidida a partir de um foco preponderantemente gerencial pelas companhias deste segmento, ou seja, tomada do ponto de vista financeiro de maximização da riqueza dos acionistas. Para testar esta suposição, adotou-se o modelo conceitual da Teoria Residual dos Dividendos, estabelecidos pioneiramente por Modigliani e Miller (1961) e revisitado por Jensen (1986) na Teoria Free Cash Flow. Assim, conduziu-se um levantamento do Fluxo de Caixa Livre do Acionista (FCLA) para todas as companhias listadas no Novo Mercado da BM&FBovespa desde a sua criação até o ano de 2011. O objetivo foi investigar o perfil da política de dividendos dessas empresas, a partir da avaliação de como elas administram o FCLA. Além disso, foi testado se as decisões sobre a destinação do saldo de FCLA impactaram na rentabilidade do acionista, expressa pela Taxa de Retorno da Ação (TRA). Como proposta secundária, foram pesquisados também os fluxos de reinvestimento dos lucros destas companhias, buscando verificar se os acionistas são recompensados por maiores ganhos de capital em contrapartida pelo não recebimento de dividendos e, também, onde são alocados os lucros reinvestidos. Como resultado, constatou-se que grande parte das companhias apresentaram elevados níveis de sobreinvestimento no período, provocado pela retenção do FCLA, e que este problema pode ter sido a causa de uma Taxa de Retorno da Ação menor em alguns setores. Adicionalmente, foi observado que as empresas que mais retiveram lucro, ao longo do tempo, foram também as que proporcionaram os maiores retornos de ganhos de capital aos seus acionistas. Por fim, detectou-se que os lucros retidos pelas companhias foram reaplicados, em sua grande maioria, em investimentos relacionados à expansão ou manutenção de suas capacidades produtivas (capital fixo), embora a maior parcela deles acabasse não sendo identificada em nenhum dos ativos expressos pelo balanço patrimonial contábil. / According to the theory of the firm, the firm is a nexus of contractual relationships between its various participants. Such contractual relations, which are not perfect, agency problems arise, elapsed the information asymmetry and conflicts of interest between the engaged and the contractor, where, agent and principal. In this case, when it is intended to align the interests between them, appears to corporate governance, acting as a means to minimize conflicts and differences existing and correct the faults present in the process of communication and information firms. In Brazil, due to the weak legal protection for minority shareholders, the high concentration of ownership in firms and the separation between common and preferred shareholders, some institutional and government measures have been taken over the years in order to contribute to the evolution of corporate governance practices in the country. One such initiative was the creation in 2000 of the Novo Mercado segment by the Bovespa, composed of rules and increasing requirements in relation to good governance practices. Therefore, it is coherent to think that the dividend policy before influenced by the need to act as an instrument for reducing conflicts between shareholders, has to be decided from a managerial focus by companies in this segment, that is, the financial point of view of maximizing shareholder wealth. To test this assumption, we adopted the conceptual model of the Residual Theory of Dividends, established pioneered by Modigliani and Miller (1961) and revisited by Jensen (1986) in the Free Cash Flow Theory. Thus, we conducted a survey of Free Cash Flow to Equity (FCFE) for all companies listed on the Novo Mercado of the BM&FBovespa since its inception until the year 2011. The aim was to investigate the profile of the dividend policy of these companies, based on the evaluation of how they manage the FCFE. Furthermore, was tested whether if decisions on the allocation of the balance of FCFE impacted the profitability of the shareholder, expressed by the Rate of Stock Return (RSR). As proposed secondary, were surveyed the flows of reinvestment of profits these companies, seeking first check whether the shareholders are rewarded by higher capital gains in return for non-receipt of dividends, and also where they are allocated reinvested earnings. As a result, it was found that most companies had high levels of overinvestment during the period, caused by retention of FCFE and that this problem may have been the cause of a Rate of Stock Return lower in some sectors. Additionally, it was observed that companies that retained earnings, over time, were also the ones that provided the highest returns of capital gains to its shareholders. Finally, it was found that profits retained by the companies were reapplied mostly in investments related to the expansion or maintenance of their productive capacity (capital assets), while the largest portion of them end up not being identified in any of the assets of the balance sheet accounting.

Segundo a teoria da firma, uma empresa é um nexo de relações contratuais entre os seus diversos participantes. Nessas relações contratuais, que não são perfeitas, surgem os problemas de agência, decorridos da assimetria informacional e dos conflitos de interesses entre o contratado e o contratante, no caso, agente e principal. Neste caso, quando se tem a intenção de alinhar os interesses entre eles, aparece a governança corporativa, atuando como um meio de minimizar os conflitos e diferenças existentes e corrigir as falhas presentes no processo de comunicação e informação das firmas. No Brasil, diante da fraca proteção legal aos acionistas minoritários, da alta concentração de propriedade nas empresas e da separação dos acionistas entre ordinários e preferenciais, algumas medidas institucionais e governamentais têm sido tomadas ao longo dos anos com o objetivo de contribuir com a evolução das práticas de governança corporativa no país. Uma dessas iniciativas foi a criação em 2000 do segmento Novo Mercado pela Bovespa, composto por regras e exigências crescentes em relação às boas práticas de governança. Nesse sentido, é coerente pensar que a política de dividendos, antes influenciada pela necessidade de atuar também como instrumento de redução de conflitos entre os acionistas, passou a ser decidida a partir de um foco preponderantemente gerencial pelas companhias deste segmento, ou seja, tomada do ponto de vista financeiro de maximização da riqueza dos acionistas. Para testar esta suposição, adotou-se o modelo conceitual da Teoria Residual dos Dividendos, estabelecidos pioneiramente por Modigliani e Miller (1961) e revisitado por Jensen (1986) na Teoria Free Cash Flow. Assim, conduziu-se um levantamento do Fluxo de Caixa Livre do Acionista (FCLA) para todas as companhias listadas no Novo Mercado da BM&FBovespa desde a sua criação até o ano de 2011. O objetivo foi investigar o perfil da política de dividendos dessas empresas, a partir da avaliação de como elas administram o FCLA. Além disso, foi testado se as decisões sobre a destinação do saldo de FCLA impactaram na rentabilidade do acionista, expressa pela Taxa de Retorno da Ação (TRA). Como proposta secundária, foram pesquisados também os fluxos de reinvestimento dos lucros destas companhias, buscando verificar se os acionistas são recompensados por maiores ganhos de capital em contrapartida pelo não recebimento de dividendos e, também, onde são alocados os lucros reinvestidos. Como resultado, constatou-se que grande parte das companhias apresentaram elevados níveis de sobreinvestimento no período, provocado pela retenção do FCLA, e que este problema pode ter sido a causa de uma Taxa de Retorno da Ação menor em alguns setores. Adicionalmente, foi observado que as empresas que mais retiveram lucro, ao longo do tempo, foram também as que proporcionaram os maiores retornos de ganhos de capital aos seus acionistas. Por fim, detectou-se que os lucros retidos pelas companhias foram reaplicados, em sua grande maioria, em investimentos relacionados à expansão ou manutenção de suas capacidades produtivas (capital fixo), embora a maior parcela deles acabasse não sendo identificada em nenhum dos ativos expressos pelo balanço patrimonial contábil. / According to the theory of the firm, the firm is a nexus of contractual relationships between its various participants. Such contractual relations, which are not perfect, agency problems arise, elapsed the information asymmetry and conflicts of interest between the engaged and the contractor, where, agent and principal. In this case, when it is intended to align the interests between them, appears to corporate governance, acting as a means to minimize conflicts and differences existing and correct the faults present in the process of communication and information firms. In Brazil, due to the weak legal protection for minority shareholders, the high concentration of ownership in firms and the separation between common and preferred shareholders, some institutional and government measures have been taken over the years in order to contribute to the evolution of corporate governance practices in the country. One such initiative was the creation in 2000 of the Novo Mercado segment by the Bovespa, composed of rules and increasing requirements in relation to good governance practices. Therefore, it is coherent to think that the dividend policy before influenced by the need to act as an instrument for reducing conflicts between shareholders, has to be decided from a managerial focus by companies in this segment, that is, the financial point of view of maximizing shareholder wealth. To test this assumption, we adopted the conceptual model of the Residual Theory of Dividends, established pioneered by Modigliani and Miller (1961) and revisited by Jensen (1986) in the Free Cash Flow Theory. Thus, we conducted a survey of Free Cash Flow to Equity (FCFE) for all companies listed on the Novo Mercado of the BM&FBovespa since its inception until the year 2011. The aim was to investigate the profile of the dividend policy of these companies, based on the evaluation of how they manage the FCFE. Furthermore, was tested whether if decisions on the allocation of the balance of FCFE impacted the profitability of the shareholder, expressed by the Rate of Stock Return (RSR). As proposed secondary, were surveyed the flows of reinvestment of profits these companies, seeking first check whether the shareholders are rewarded by higher capital gains in return for non-receipt of dividends, and also where they are allocated reinvested earnings. As a result, it was found that most companies had high levels of overinvestment during the period, caused by retention of FCFE and that this problem may have been the cause of a Rate of Stock Return lower in some sectors. Additionally, it was observed that companies that retained earnings, over time, were also the ones that provided the highest returns of capital gains to its shareholders. Finally, it was found that profits retained by the companies were reapplied mostly in investments related to the expansion or maintenance of their productive capacity (capital assets), while the largest portion of them end up not being identified in any of the assets of the balance sheet accounting.

The topic of this Bachelor Thesis is “Which of these valuation methods provides the most accurate valuation forecast”. Assuming that the year is 2020, the goal of this thesis is to forecast the future stock prices of the fifty largest US-based companies on the Nasdaq stock exchange for 2021 and 2022. By using a quantitative method and looking ten years back at historical data. We determine which valuation method provides the most accurate stock price when conducted in a non-sector specific sample by comparing predicted prices to actual stock prices and discussing the results. There are several ways to evaluate a company and the ones being utilized in this thesis are the discounted cash flow valuation method, the price-to-earnings ratio method (equity multiple), and enterprise value to enterprise value before interest, tax, and depreciation (firm multiple). Our results show that when reviewing the valuations of multiple companies in different sectors the relative valuation methods provide better predictions with EV/EBITDA rather than the discounted cash flow method. This thesis provides the reader with a comprehensive overview of these different valuation methods and their effectiveness in providing valuation forecasts. The result of this thesis is beneficial for policymakers, investors, and financial analysts when forecasting future stock prices.