For the stock analysis and valuation, our group has chosen Vinamilk

(VNM). In this study, we are implementing two pricing methods: the

Dividend Discount Model and the Free Cash Flow to the Firm.

Dividend Discount Model – DDM is a quantitative method used for

predicting the price of a company's stock based on the theory that its
present-day price is worth the sum of all of its future dividend payments
when discounted back to its present value. It attempts to calculate the
fair value of a stock irrespective of the prevailing market conditions and
takes into consideration the dividend payout factors and the market
expected returns.

Shareholders who invest their money in stocks take a risk as their

purchased stocks may decline in value. Against this risk, they expect a
return/compensation. Similar to a landlord renting out his property for
rent, the stock investors act as money lenders to the firm and expect a
certain rate of return. A firm's cost of equity capital represents the
compensation the market and investors demand in exchange for owning
the asset and bearing the risk of ownership. This rate of return is
estimated using the Capital Asset Pricing Model (CAPM)

ERi = Rf + βi(ERm − Rf)

Where:
ERi = expected return of investment
Rf = risk-free rate
βi = beta of the investment
(ERm−Rf) = market risk premium
Based on the expected dividend per share and the net discounting factor,
the formula for valuing a stock using the dividend discount model is
mathematically represented as,

D1 D2 D3 D4 D5 D 6 + P6
V 0= + + + + +
1+ E r 1 (1+ E r 2) (1+ E r 3) (1+ E r 4 ) (1+ E r 5) (1+ E r 6)6
2 3 4 5

Where:
D t = Dividend = DPS × Oustanding Shares
E r t = Expected return of investment caculate by CAPM
Pt = Average stock price

In 2015, the Intrinsic value of VNM's stock estimated by DDM method

(about 32.857,718) < the Market price (109.883,065). Thus, the VNM's
stocks had been overpriced so that the investors should not buy the
VNM's stocks.

Free cash flow to the firm (FCFF) represents the amount of cash flow
from operations available for distribution after accounting for
depreciation expenses, taxes, working capital, and investments. FCFF is
a measurement of a company's profitability after all expenses and
reinvestments.

FCFF = (EBIT × (1 − TR))− D – Capex − ΔNWC

Where:
EBIT = Earnings before interest and taxes
D = Depreciation
TR = Tax Rate
Capex = Capital expenditure
ΔNWC = ΔNet working capital
In 2015, the Intrinsic value of VNM's stock estimated by FCFF method
(about 29.724,132) < the Market price (109.883,065). Thus, the VNM's
stocks had been overpriced so that the investors should not buy the
VNM's stocks.

Intrinsic Value is a measure of the value of an investment based on its

cash flows. This measure is arrived at by means of an objective
calculation or complex financial model, rather than using the current
trading market price of that asset. Intrinsic value shows you the asset’s
value based on an analysis of its actual financial performance and
basically represents the net present value of all the future free cash flows
to equity (FCFE) of a company during the entire course of its existence.
It is the reflection of the actual worth of the business underlying the
stock, i.e., the amount of money that can be received if the whole
business and all of its assets are sold off today.

FCF E1
Intrinsic Value of Business= ¿¿
Where:
FCFEi = Free cash flow to equity in the ith year
FCFEi = Net incomei + Depreciation & Amortisationi – Increase in
Working Capitali – Increase in Capital Expenditurei – Debt Repayment
on existing debti + Fresh Debt raisedi
TV = Terminal Value
r = Discount rate
n = Last projected year

The calculation of the intrinsic value formula of the stock is done by

dividing the value of the business by the number of outstanding shares
of the company in the market, effectively the intrinsic value per share.
The value of stock derived in this way is then compared with the market
price of the stock to check if the stock is trading above, at par, or below
its intrinsic value.

Intrinsic Value of Business

Intrinsic Value of Stock =
No. of Outstanding Shares