Finance 3100 Exam # 3

Finance 3100 Exam # 3 - Finance Chapter 7 Stock valuation...

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Finance Chapter 7 – Stock valuation Major source of financing for a firm is issuing stock, or selling ownership in the firm to the public. Unlike debt, stock is considered permanent financing Common stock represents an equity claim , a claim to firm assets and cash flows once debt claimants are paid o It is a residual claim after employees, suppliers, taxes, and creditors have been paid. Investors earn a return from stock ownership in two possible ways: o Share appreciation o Dividends o Or both S t o c k is considered permanent financing There is no obligation for the company to buy back your stock; the only way to get your money back is if another investor wants to buy it. The value to another investor is the present value of the expected, future cash flows…the dividends…at that time. Stock price is the consensus of future cash flow estimates and the discount rate. It anticipates a firm’s ability to generate earnings, which enhances its ability to pay dividends. There are five models: o Constant Dividend w/ Infinite Horizon o The firm pays constant annual dividends. o We can use the current dividend to predict future dividends, because they are all the same o We can value the perpetual dividend stream to price the stock given a required rate of return.
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