FIN2004 JAN17 Tutorial 6 Stock Valuation (1).pdf - FIN 2004 Finance Tutorial 6 Stock Valuation Conducted by Mr Chong Lock Kuah CFA 1 Revisit Equity

FIN2004 JAN17 Tutorial 6 Stock Valuation (1).pdf - FIN 2004...

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1 FIN 2004 Finance Tutorial 6 : Stock Valuation Conducted by : Mr Chong Lock Kuah, CFA
2 Revisit Equity Valuation Methods The intrinsic value of any investment is the present value of the future cash flows that will accrue to the owner of the investment asset. In general, this means that the price of a security, is : = CF 1 (1+ r 1 ) CF 2 (1+ r 2 ) 2 CF 3 (1+ r 3 ) 3 CF n (1+ r n ) n + + + ……. + where CF 1 , CF 2 , CF 3 , …..CF n are future cash flows for period 1, 2, 3….up to period n, and r 1 , r 2 , r 3 , ………r n are the rates of discount for the relevant time period p ˆ 0 p ˆ 0 is the intrinsic value 0 ˆ P
3 Dividend Discount Model The valuation formula for a stock is based upon the present value of the dividends that are expected to be received by investors : where D 1 , D 2 , D 3 , …..D n are expected dividends for period 1, 2, 3….up to period n, and r is the return required (or discount rate) on the stock. For simplicity, we use a single discount rate. D 1 (1+ r) D 2 (1+ r) 2 D 3 (1+ r) 3 D n (1+ r) n + + + ……. + 0 ˆ P = is the intrinsic value of the stock today based on a particular investor’s estimate of the stock’s expected dividend stream and the riskiness of that stream. 0 ˆ P