The expected return on a stock calculated using the CAPM is often used as an estimate of the cost of equity in the dividend discount model of share valuation.However the CAPM method has been criticized in extant literature mainly on account of the frailties associated with the beta estimation process.
Net Assets Method:
Under this method, the first step is to calculate the net assets of the company. This is done by taking into account the various balance sheet items like assets, liabilities etc. The calculation of assets also includes the calculation of goodwill which should be included. The fixed assets are valued at the NRV which is their Net Realizable Value. Also, there are different ways to handle the various other items on the balance sheet and the way to value them in this method. Once the valuation is complete, we get the net assets that the company owns under the present circumstance. The preference share capital is also deducted from the net assets of the company to ensure that the primary share value is eventually calculated. This net asset value is then used along with the number of shares outstanding to arrive at the final share valuation for the company. This method is usually done for companies where the DDM is not possible due to various reasons. Companies like start-ups and other such companies do not have any history of dividends use this method to value the share. It is also used in companies where there is no history of profits and there is no profit in the foreseeable future of the company.