Firms, even in the same industry, can only be evaluated on the basis of their ratios when their business characteristics are relatively similar. This includes products, markets, responses to economic stimulus, cost of capital and a variety of other attributes. The further Citrus Glow is from its competitors on any key measure the less useful Dan's method becomes. Furthermore, Dan's assumptions regarding the firm's growth prospects are arbitrary, rather than based on accurate assessments of the firm's expected future performance.
4. Joe's variable growth rate approach takes the belief that investors only pay for the known cash flows, that is to say the dividends. In this case, the assumed dividend would begin at $1.50 per share. The terminal value is $8.83, giving the stock a value of $26.63. This sits above Lisa's number, and presumably somewhere below Dan's undisclosed number, since most of his totals are above this point.
5. Each of these numbers has flaws in its assumptions. Dan's methodology is riddled with flaws as it would require an arbitrary determination of weighting on the ratios in order to come to a final figure, and is founded on the baseless assumption that the market will treat Citrus Glow the same as it does Dan's basket of competing firms. Joe's approach is a poor one for a growth company. The company only made $1.74 per share...
Moreover, when markets value growth companies they take into consideration the growth aspect of the firm's earnings, not its dividends. The dividend discount model is best suited for mature firms, not firms like Citrus Glow.
Lisa's model is the most fundamentally sound, but even with that model there are assumptions that can be questioned. Her view of the free cash flow is strange, as by taking NOPAT and removing net capital investment she would still be including depreciation in cash flow. If depreciation is removed from the equation, the stock's value is $4.03 per share, or $131 million. This figure is above the firm's book value of $95 million, but this is far too low a multiple for a growth company like Citrus.
With each method, as described, being fundamentally flawed, it is difficult to determine a fair value of the company. Among competitors the highest growth stories are afforded better price/book ratios. The way the market views Citrus Glow's growth prospects will go a long way to determining the true value of the company. With Dan's numbers being unreliable and Lisa's being flawed, Joe's make the most sense, at least if we adjust the dividend value to something more realistic, in the $0.40-$0.50 range. Thus, a $30 IPO price is not unreasonable…
