Accuracy of dividend discount model and p/e ratio valuation in Indonesia stock exchange

Abstract

The calculation of the intrinsic value of shares is essential for investors. The result can be used as a guideline for buying, selling, or holding shares. This research was conducted because the stock price on the Indonesia Stock Exchange (IDX) in March 2020 experienced a deep decline, namely a decrease of 38% on average, so it is interesting to study. In determining the intrinsic value of these shares, the Dividend Discount Model (DDM) and Price Earning Ratio (P/E Ratio) methods will be used as well as evaluate the most accurate method. The study uses stock data from all business sectors on the IDX for the 2014-2019 period, especially companies that pay dividends. The sample used in this study were 49 companies (22%) of the average 222 companies that distributed dividend. Based on the results of the study, DDM, and P/E Ratio there are 43 companies (86%) in undervalued positions or only seven overvalued companies (10%). MOS is greater than 30% with DDM and P/E Ratio of 26 companies (52%). Likewise, with the results of the accuracy-test using the Mean Absolute Pricing Error (MAPE), it turns out that DDM is only 0.14% greater than the P/E Ratio. It can be said that DDM is relatively more accurate than the P/E Ratio. Thus overall the calculation of the intrinsic value of shares using DDM and the P/E Ratio in terms of undervalued or overvalued, MOS and accuracy can be concluded that there is no significant difference.