Using multiple techniques to value a company's stock is helpful due to the imperfections and uncertainty in the implementation of valuation methodologies. You like using the dividend discount model and market multiple methods because they are much simpler than doing all the work to estimate FF and the intrinsic value of operations, add back in other investments in non operating assets and then subtract out the market values of debt and preferreds.

A. What is the main risk of using a simple Price/Earnings ratio to value a company?

B. How might using at a Price/Sales ratio be an improvement from a P/E?

C. Describe a situation where using a dividend discount model adds insight into a stock's valuation over using a simple P/E ratio?

D. What action has the company you are evaluating in your team project taken in the last two years that made it harder to use the DDM and why is that the case?

E. In estimating beta for your company, as part of estimating the WACC that you will use in your DDM analysis, you notice that it is not stable over different historical time periods. What is another technique you could use to estimate the cost of common stock and use as a cross check to your CAPM derived results?