stock valuation - handout

stock valuation - handout - Stock Valuation Mind Map s...

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Stock Valuation
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Mind Map Why?: Common stock (aka common equity) represents ownership in a firm. As such, common stock holders have a residual claim on the earnings and assets of the firm. In this section, we discuss the basic models used to value equity. This is sometimes difficult given the uncertainty associated with equity cash flows.
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Mind Map Learning objective: Calculate the value of common and preferred stock with the basic valuation models, including: » Single-period model » Constant growth model » Two-stage model
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Mind Map Key words/concepts: Preferred stock Common stock Dividend discount model Constant growth model (aka Gordon Growth) Two-stage model
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Stock Valuation The intrinsic value of an asset = the present value of the stream of expected cash flows discounted at an appropriate required rate of return . Does this sound familiar? (Recall our discussion of bond valuation)
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Usually sold for $25, $50, or $100 per share par value. Dividends are often quoted as a percentage of par. Example: In 1988, Xerox issued $75 million of 8.25% preferred stock at $50 per share. $4.125 is the fixed, annual dividend per share (i.e., $50 x .0825). Preferred Stock
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HOW DO YOU VALUE UNENDING CASH FLOWS? This is an unending (i.e., infinite maturity) annuity. What do you know? Payment Discount rate maturity?
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Preferred Stock Valuation Preferred stocks can usually be valued like a perpetuity: V = D k ps ps
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Example: Xerox preferred pays $4.125 dividend per year. Suppose our required rate of return on Xerox preferred is 9.5%
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Example: Xerox preferred that pays $4.125 dividend per year. Suppose our required rate of return on Xerox preferred is 9.5% V ps = 4.125 .095 = $43.42
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stock valuation - handout - Stock Valuation Mind Map s...

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