Module 4 Lecture 8LOVESIT - Module 4 Lecture 8: Valuing...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Module 4 Lecture 8: Valuing Common Stocks: An introduction to share prices 11/13/08 In general, what is true about inflation for consumer prices in the US? - Because of the recession, inflation dropped to zero early this year - With the exception of food and energy, it’s quite low compared to historic levels o Joke: as long as you don’t drive and eat, you’re ok The process of computing the present value of sum of money is called - Discounting o F= P*(1+r)^t. 1/(1+r)^t Is called the discount term or something… Finance: How investors use their money. Lecture Outline Valuing Common Stocks The daily battle between greed and fear Long-run valuation of future cash flows- dependent on analyst estimating how much firm is going to earn in the future. Price/Earnings ratio handles different stock prices, different earnings Some stocks cost $4 and pay dividends… some $100 and doesn’t. Diversification (investing in more than one company) Unique risk versus Market risk (diversification gets rid of unique risk) Portfolios Valuing Common Stocks 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.] Ex: Washington Mutual- declared bankrupt. If you have common stock then, you aren’t going to get any of that back probably. Bonds get paid maybe 80% though. Where do stock prices come from? Book value? (Not likely) Remember, this ignores “going concern” value GM is actually -98 dollars SBUX is a few dollars and sells for 10. Value of the underlying assets (possibly) Only If we shut down and sell off all those depreciated assets that were written off over time. Sophisticated investors “discounting” the expected future cash flows ( earnings , not dividends) of the firm Long term – SBUX doesn’t pay dividends, but is fairly well run company Supply and demand in the market place, sentiment, “herding” Short term (the daily battle between greed and fear) – follow people to see what action is about CHART: if you are discounting future cash flows, how can it be worth 450 and 430 on the same day? People opening up their computers and saying google is high, I think I’ll buy some, other people say I think I’ll start selling. People in market start talking. Moment to moment, day to day – tussle Stock Prices Reflect the Long-run “Value”
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/12/2010 for the course UGBA 10 taught by Professor Xuanmingsu during the Spring '08 term at University of California, Berkeley.

Page1 / 4

Module 4 Lecture 8LOVESIT - Module 4 Lecture 8: Valuing...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online