2.stock valuation

# 2.stock valuation - Stock Valuation Stock Valuation 1 What...

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1 Stock Valuation Stock Valuation

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2 What is Stock? > a security that pays an uncertain cash flow > that implies ownership of the corporation > has limited liability Stock valuation: Price/Intrinsic Value=
3 The Dividend Discount Model : P 0 = Div 1 + P 1 (1 + r e ) and (1 + r e ) = Div 1 + P 1 P 0 r e = ( Div 1 + P 1 " P 0 ) P 0 where Div 1 P 0 = dividend yield and P 1 " P 0 P 0 = capital gains yield For a two period investor P 0 = Div 1 (1 + r e ) + Div 2 + P 2 (1 + r e ) 2 For an n-period investor P 0 = Div 1 (1 + r e ) + Div 2 (1 + r e ) 2 + Div 3 (1 + r e ) 3 + ... + Div n (1 + r e ) n + P n (1 + r e ) n P 0 = Div n (1 + r e ) n n = 1 " # = Div r e

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4 A stock whose dividends are expected to grow at a constant rate, g, will be worth : P 0 = Div 1 ( r e " g ) = Div 0 (1 + g ) ( r e " g ) or r e = Div 1 P 0 + g Div = Earnings Shares outstanding . Dividend payout ratio Forecasting growth : How does a firm grow? Payout ratio = DPS/EPS Plowback Ratio, b = (1 – Payout Ratio) =Retained earnings/EPS If growth is internally financed g = ROE * (1-Payout Ratio) = ROE*b ROE is the return on new investment .
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## This note was uploaded on 01/20/2010 for the course ECON econ134 taught by Professor M. during the Fall '09 term at UCSB.

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2.stock valuation - Stock Valuation Stock Valuation 1 What...

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