FI.Chapter8 - Socks,Stsek VaFere:*ar, , ')' a*d St*k P#...

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a*d St**k S€ocks, Stsek VaFere€:*ar, , ')' P# arkeB tq a:e E E F:re u ree t-tl't \ ) rom slightly less than 4,000 in cnrly tcrrorist atLacks of ScPiomber 11, 200l lt 1 995, the Do\\' J oncs Industrial Avorage surgcd back uP io 1 0,635 in early 2002, tru t frll surgcd to 11,723 in c.irly 2000. To put to 7,286 by late 2002 In nlid 2006, the Drirkui this rerrnrklble 7,723 point risc in pefspec' stood at nbout 10,989 rive, considcr that the Do\,v firsr rcached 1,000 Note t(x) ihat while all boats rnay risc lvith in 1965, then rcok anothcf 22 years io hit thc iide, the same docs noi hdd f(t skrk 2,000, thcn 4 more ycars to reach 3,000, .nd markcis-regardless of thc trend, so c indi- anoiher.l to get to 1,000 (in 1995). Then, nr vidual sk,cks alwa)'s rnrkc'huge gajns $l]il. iust over 5 )'cars, it reachcd 11,723. ThrN, h others suffcr substantial losscs. Even though thos€ 5 years investors nude aLnosi twice as the overnll market tvas uP I 7t'. in 2005, manv mucll h rhe sbck market is rhey madc in the indivld ,rl stocks pcrformed nuch bcttcr previous 70 yearsl whilc othcrs pe orncd worse. For exalnplc, Thai bull rnarket rnado it possiblelor nanv APPIe CorrPuter rose rrorc than 123%, but people to take earl)' retircment, buy expcn- GM $as dorvn 515% ln tcrms ot mnrket sive homljs, and affor(l lnrge cxpcndiirfes value, Genentech ad.]ccl nore than $40 billion such as collegc tuiiion. Encouraged by this to its stockLlolders' $'calih, $'lile Dell's shift' pcrformnnce, nore and more nrvosk)rs holdcrs saw more ihan llj28 billion oI $'calth flockcd b the markei, and todaymore than 79 evaPorait. nrillnD Anri'ricans own st()ck. Moreover a Although itisdifficutt k)predictpftLet, Ne rising sto.k market made it easier and chenp- are not completely h ihe c{.lrk ren it.onres cr for corporations to fiise equit)' capital, to valuing stocks lndeccl, nfter studyhg this !\ hich f,rLilitated ecun,,nric trowth. . h.,pl, r. v,r, -hould h,,v, ,r n,r,.,rrdhlv F.'. J Howcvcr some observors u,ere concenod understanding of the facL()rs that intluence that nrany investors did not rc'nlize just hoiY stock Priccs With that knowledge-ai.t .1 lit- riskv thesk)ck narket is. Indeed, thc Dorv felL tLe l ck-yor.r may be abte to find thc ncxt all the way Lo 8,236 in thc dntrs folowing ihe APplc or Cenentech and avoid future CMs.
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L€gol Righis ond Pdvilege! of Common Sbckhold66 Ir Chapterc 6 and 7 we examined dsk and requiled stock retufis. h this chapter we will us€ those rcsults to estimate ihe intrinsic vaiue of a stock with the dividend growth model. The concepts and models developed here will also be used when w€ estimate tlrc cost of capital in Chapter 10. In subsequent chapiers, we will demonstrate how the cost of capitai is used to heip make many impo*ant deci- sions, especially the decision to invest or not invest in new assets. Consequently/ it is criiically important that you understand the basics of stock valuation.
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This note was uploaded on 06/08/2009 for the course FI 601-602 FI601-602 taught by Professor Prof.geary during the Spring '09 term at New Haven.

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FI.Chapter8 - Socks,Stsek VaFere:*ar, , ')' a*d St*k P#...

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