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ch8-lect - Chapter 8 Valuing Common Stocks Introduction...

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Chapter 8 Valuing Common Stocks Introduction This week we’ll move into using Excel to help us determine and monitor the value of the firm. Much of the theory should be familiar from MGMT 640 and FIN 610, but take an opportunity to review. The book begins by discussing the definitions of book, intrinsic, and market value of an asset, such as stock. The book value is the price of the asset, less its accumulated depreciation. The intrinsic value takes the present value of the future cash flows of an asset, discounted at the investor’s required rate of return. The market value is price of the asset as determined by the market place. Common Stock Valuation A stock can be valued by discounting its dividends. In our review, we cover three types of situations: a. The case of zero growth of dividends. b. The case of constant growth of dividends. c. The case of differential (staged) growth. Valuing stocks is similar to valuing bonds. We need to determine the present value of the future cash flows, which consists of future dividend payments, and the market value of the stock. From accounting, we know that earnings are divided into two parts: dividends and retained earnings.
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