Chapter 9 - 9-1CHAPTER 9Stocks and Their Valuation Features...

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Unformatted text preview: 9-1CHAPTER 9Stocks and Their Valuation Features of common stockDetermining common stock valuesPreferred stock9-2Facts about common stockRepresents ownershipOwnership implies controlStockholders elect directorsDirectors hire managementManagement’s goal: Maximize the stock price9-3Facts about common stockShareholders are paid with residual earnings – after all the operating expenses, financial expenses (interest payments) and preferred dividends are paid.As compared to bondholders who are entitled to receiving a fixed interest payment periodically, shareholders are entitled to the residuals after all payments. The residual earnings could be retained by the company for future investments – shareholders will receive the portion of residual earnings paid out.Shareholders do not have the right to demand for dividend payments. Shareholders cannot ask the company to redeem the shares for cash. There is no maturity for stocks.9-4Facts about common stockThe cash flows to be received by shareholders are:Dividends if they are paid;Shareholders will continued to receive dividends if they keep on holding to the stockDividend payouts depend on corporate earningsUsing a Discounted Dividend Approach for stock valuation, the price of a stock is therefore depending on the (future) dividends paid, which in turn depending on the (future) earnings generated by the corporation Capital gains if shares are sold.9-5Intrinsic Value and Stock PriceOutside investors, corporate insiders, and analysts use a variety of approaches to estimate a stock’s intrinsic value (P).In equilibrium we assume that a stock’s price equals its intrinsic value.Outsiders estimate intrinsic value to help determine which stocks are attractive to buy and/or sell.Stocks with a price below (above) its intrinsic value are undervalued (overvalued).9-6Determinants of Intrinsic Value and Stock Prices (Figure 1-1)9-7Different approaches for estimating the intrinsic value of a common stock1. Capitalization of Earnings Approach -Dividend Growth Model:Zero growth modelConstant growth modelSupernormal growth model2. Discounted Free Cash Flow Approach - Corporate value model3. Comparable Guideline Company Approach (also called the Market Approach): Using the multiples of comparable firms: P/E, P/Sales, P/EBIT, etc.9-8Approach 1: Capitalization of Earnings Approach: Dividend growth modelValue of a stock is the present value of the future dividends expected to be generated by the stock....
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Chapter 9 - 9-1CHAPTER 9Stocks and Their Valuation Features...

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