Atitsprevailingmarketpriceof$60ashare(inNovember
2005), ExxonMobil looks undervalued.
Valuing Entire Markets or Sectors
Allourexamplesofthedividenddiscountmodelsofarhave
involvedindividualcompanies,butthereisnoreasonwhywe
cannotapplythesamemodeltovaluea sectororeventhe
entire market. The market price of the stock would be
replacedbythecumulativemarketvalueofallofthestocksin
thesectorormarket.Theexpecteddividendswouldbe the
cumulated dividends of all these stocks and could be
expanded to include stock buy-backs by all firms. The
expectedgrowthratewouldbethegrowthrateincumulated
earningsanddividendsoftheindex.Therewouldbenoneed
for a beta orbetas if we arelookingat theentire market
(whichshouldhaveabetaof1),andthesectorbetacanbe
usedwhenvaluingasectortoestimateacostofequity.We
coulduse a two-stagemodel, wherethe expectedearnings
growthrateisgreaterthanthegrowthrateoftheeconomy,
butweshouldbecautiousaboutsettingthegrowthratetoo
highorthegrowthperiodtoolongwhenvaluingtheentire
market because it will be difficult for cumulated earnings
growthofallfirmsinaneconomytorunaheadofthegrowth
rate in the economy for extended periods.