m3l8 - Spring 2008 Module 3 Accounting Finance Lecture 8...

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David Robinson © D. Robinson, 2008 Spring 2008 Module 3 Accounting & Finance Lecture 8: Valuing Common Stocks: An Introduction to Share Prices
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Accounting & Finance Accounting Finance Managerial Financial Auditing How investors use their money How firms raise money Three financial statements Forms of business Income St. Balance Sheet St. Cash Flows
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Lecture Outline Valuing Common Stocks The daily battle between greed and fear Long-run valuation of future cash flows Price/Earnings ratio handles different stock prices, different earnings Diversification Unique risk versus Market risk Portfolios
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Valuing Common Stocks
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Common Stock is even more risky than a corporate bond We hope to get a bigger return, But Dividends are not guaranteed If the company fails (goes bankrupt) we’ll likely get nothing at all [Bond holders (owners) are creditors of the firm and get paid in full before shareholders get what’s left.]
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Stocks are Risky Bear Stearns closes Friday at $30.85 , after starting the year 2008 at $100
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Where do stock prices come from ? Book value? (Not likely) Remember, this ignores “going concern” value Value of the underlying assets (possibly) If we shut down and sell off all those depreciated assets Sophisticated investors “discounting” the expected future cash flows (earnings, not dividends) of the firm Long term Supply and demand in the market place, sentiment, “herding” Short term (the daily battle between greed and fear ) Remember this!
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The daily battle (Friday) between greed and fear Is the stock worth $450 . . .
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