Chapter_10_-_Common_Stock_Valuation

Chapter_10_-_Common_Stock_Valuation - ommon Stock Common...

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Unformatted text preview: ommon Stock Common Stock aluation Valuation Chapter 10 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons 10-1 Fundamental Analysis resent value approach Present value approach Capitalization of expected income trinsic value based on the discounted Intrinsic value based on the discounted value of the expected stream of cash flows ultiple of earnings approach Multiple of earnings approach Valuation relative to a financial performance measure Justified P/E ratio 10-2 Present Value Approach trinsic value of a security is Intrinsic value of a security is c n Cash Flows alue of urity stimated intrinsic value compared to 1 sec 1 t t Value of urity ( r ) = = + Estimated intrinsic value compared to the current market price hat if market price is different than What if market price is different than estimated intrinsic value? 10-3 Required Inputs iscount rate Discount rate Required rate of return: minimum expected rate to induce purchase The opportunity cost of dollars used for investment Expected cash flows Stream of dividends or other cash payouts over the life of the investment 10-4 Required Inputs xpected cash flows Expected cash flows Dividends paid out of earnings Earnings important in valuing stocks g p g Retained earnings enhance future earnings and ultimately dividends Retained earnings imply growth and future dividends roduces similar results as current dividends in Produces similar results as current dividends in valuation of common shares 10-5 Dividend Discount Model urrent value of a share of stock is the Current value of a share of stock is the discounted value of all future dividends 1 2 1 2 1 1 cs D D D P ... r ) ( r ) ( r ) = + + + + + 1 1 1 cs cs cs t t ( r ) ( r ) ( r ) D r ) + + + = 1 1 t cs ( r ) = + 10-6 Dividend Discount Model roblems: Problems: Need infinite stream of dividends ividend stream is uncertain Dividend stream is uncertain Must estimate future dividends...
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This note was uploaded on 06/02/2011 for the course FINA 3331 taught by Professor Staff during the Spring '08 term at Texas A&M University, Corpus Christi.

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Chapter_10_-_Common_Stock_Valuation - ommon Stock Common...

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