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