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CH-9 - Investments An Introduction Chapter Stock 9 T he...

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Investments: An Introduction 10e Herbert B. Mayo Chapter 9 : The Valuation of Common Stock
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2 Expected Return Sum of expected dividends and expected capital gains E(r) = E(D)/P + E(g)
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3 Valuation The determination of what a stock is worth; the stock's intrinsic value If the price exceeds the valuation, buy the stock. If the price is less than the valuation, short the stock.
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4 Dividend Valuation Model If the dividend is fixed, valuation is V=D/k
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5 Dividend Valuation Model If the dividend grows at a constant rate, valuation is V=D 0 (1+g)/(k - g)
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6 The Dividend Growth Model Value depends on the the required return, the dividend, and the growth in the dividend.
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7 The Required Return (k) Depends on – the risk-free rate (r f ), the return on the market (r m ), and the stock's beta.
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8 Relationship Between Risk and Required Return 2.0 1.5 1.0 0.5 20 15 10 5 k=3.5% +(10% - 3.5%)ß B A Required Return (%) Risk ß 1.8 0.8 8.7 15.2
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9 Alternative Valuation Techniques A price-earnings (P/E) multiple times earnings P=(m)(EPS)
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