CH-9 - Investments: An Introduction 10e H er ber t B. M ayo...

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Unformatted text preview: Investments: An Introduction 10e H er ber t B. M ayo Chapter 9 : The Valuation of Common Stock 2 Expected Return • Sum of expected dividends and expected capital gains • E(r) = E(D)/P + E(g) 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. 4 Dividend Valuation Model • If the dividend is fixed, valuation is V=D/k 5 Dividend Valuation Model • If the dividend grows at a constant rate, valuation is V=D (1+g)/(k - g) 6 The Dividend Growth Model • Value depends on the – the required return, – the dividend, and – the growth in the dividend. 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. 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 9 Alternative Valuation Techniques • A price-earnings (P/E) multiple times earnings • P=(m)(EPS) 10...
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This note was uploaded on 09/21/2011 for the course FINANCE 4320 taught by Professor Omaral-nasser during the Spring '11 term at University of Houston-Victoria.

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CH-9 - Investments: An Introduction 10e H er ber t B. M ayo...

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