Performance Evaluation of Dividend Discount Model (DDM), Discounted Free Cash Flow to Equity (FCFE), Discounted Residual Income (RIM) and Price to Earnings Ratio (P/E) in Valuation of Companies Accep

The current research aims to survey and evaluate the performance of dividend discount model (DDM), discounted free cash flow to equity (FCFE), discounted residual income (RIM) and price to earnings ratio (P/E) in valuation of companies accepted in Tehran stock Exchange in different industries. This research is an applied, descriptive-correlative research. In this research the intrinsic value of the companyʹs shares in a few industries are separately surveyed based on the mentioned models, and then the achieved answers are compared with the market value of each company and the model that has the least deviation from the market values of the companies is the best model for using in valuation of companies shares in that industry. The research period is 5 years (from 2007 to 2011), and the population includes all of the companies being accepted in Tehran stock exchange that are active in each of the industries of manufacturing basic metals, chemical products, mining metal ores, vehicles and parts manufacturing, cement, lime and plaster, and pharmaceutical products. The research sample achieved by elimination method includes 60 companies and the number of observations equal 300 companies per year. Results show that in Iranian capital market using each of the above mentioned models in valuation of active accepted companies has a significant difference with the market values of the companies. Also further surveys show that in all the industries the mean error of the model to the P/E ratio is less than the model of market values of the companies’ ratio, and this indicates that among the surveyed models the best model for valuation of companies’ shares is the P/E model. In terms of other models also FCFE is at the 2nd place in all of the industries and RIM and DDM are at the 3rd and 4rd place.