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Lecture 6- Stocks - Equity Valuation Purpose To identity...

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Equity Valuation Purpose: To identity mispriced securities Approaches: Fundamental Valuation Models Dividend Discount Model (DDM) Free Cash Flow to Firm Relative Valuation Models Price / Earnings ratios Price / Book ratios Contingent Claims Analysis Equity as a call option
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Dividend Discount Model The value of any security can be thought of as the present value of the expected future cash flows. You want to buy 1 share of ABC inc. and hold it for one year. What are the appropriate cash flows to consider?
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Case #1: Constant Dividends
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Case #1: Constant Dividends For what type of security is this an appropriate model? Preferred Shares Usually pay a set (constant) dividend indefinitly This dividend has to be paid before dividends can be paid to common shareholders Preferred shareholders can’t force a firm into bankruptcy for non- payment of dividends.
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