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# Chap06 slides - Chapter 6 Common Stock Valuation 1 Chapter...

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1 Chapter 6 Common Stock Valuation

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2 Chapter Outline Fundamental Analysis Dividend Discount Model Constant growth DDM Perpetual constant growth DDM Sustainable Growth Rate Two-stage Growth DDM Residual Income Model Relative Valuation Price ratios
3 Fundamental Analysis Fundamental analysis is a term for studying a company’s accounting statements and other financial and economic information to estimate the economic value of a company’s stock. The basic idea is to identify “undervalued” stocks to buy and “overvalued” stocks to sell.

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4 The Dividend Discount Model The Dividend Discount Model (DDM) is a method to estimate the value of a share of stock by discounting all expected future dividend payments. The basic DDM equation is: ( 29 ( 29 ( 29 ( 29 T T 3 3 2 2 1 0 k 1 D k 1 D k 1 D k 1 D V + + + + + + + + =
5 Problem 1: The Dividend Discount  Model Suppose that a stock will pay three annual dividends of \$200 per year, and the appropriate risk-adjusted discount rate, k, is 8%. In this case, what is the value of the stock today?

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6 The Dividend Discount Model:  the Constant Growth Rate Model Assume that the dividends will grow at a constant growth rate g. The dividend next period (t + 1) is: For constant dividend growth, the DDM formula becomes: g k if D T V g k if k 1 g 1 1 g k g) (1 D V 0 0 T 0 0 = × = + + - - + =
Problem 2: The Constant Growth  Rate Model Suppose the current dividend is \$10, the dividend growth rate is 10%, there will be 20 yearly dividends, and the appropriate discount rate is 8%. What is the current value of the stock, based on

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Chap06 slides - Chapter 6 Common Stock Valuation 1 Chapter...

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