Financial Management: Principles and Applications, 13/e

10.2 The Comparables Approach to Valuing Common Stock

The discounted dividend valuation model provides a good framework for estimating the value of common stock and for understanding what drives stock prices up and down. However, this approach requires a number of inputs, such as the rate of growth and the discount rate, that are difficult to estimate, especially for companies like Alphabet (GOOG), eBay (EBAY), and Amazon.com (AMZN) that do not yet pay cash dividends. For this reason, analysts often use market comparables or “comps” to estimate firm values. This method estimates the value of the firm’s stock as a multiple of some measure of firm performance, such as the firm’s earnings per share, book value per share, sales per share, or cash ...