Stock Market Flucuations

Stock Market Flucuations - STOCK MARKET FLUCTUATIONS Asset...

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STOCK MARKET FLUCTUATIONS Asset Valuation o When deciding whether to buy a company’s stock, you compare the price of a share to the value of the company. o If share price > value, the stock is overvalued . o If price < value, the stock is undervalued . o If price = value, the stock is fairly valued . o How does one determine the stock’s value? Valuing a share of stock o If you buy a share of AT&T stock today, o you will be able to sell it in 3 years for $30. o you will receive a $1 dividend at the end of each of those 3 years. o If the prevailing interest rate is 10%, what is the value of a share of AT&T stock today? The value of a share of AT&T stock equals the sum of the numbers in the last column: $25.03 Asset Valuation o Value of a share = PV of any dividends the stock will pay + PV of the price you get when you sell the share
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o PROBLEM : When you buy the share, you don’t know what future dividends or prices will be. o
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This note was uploaded on 02/17/2011 for the course ECON 011 taught by Professor Yezer during the Spring '07 term at GWU.

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Stock Market Flucuations - STOCK MARKET FLUCTUATIONS Asset...

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