Chapter 7 - 1 Chapter 7 Valuing Stocks The Application of...

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Unformatted text preview: 1 Chapter 7 Valuing Stocks The Application of the Present Value Concept 2 Topics Covered Stocks and the Stock Market Market Values, Book Values, and Liquidation Values Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income Stocks There are no free lunches on Wall Street 3 What is a stock? A (common) stock is a financial claim that has the following properties: A right to receive dividends after creditors and bondholders (debt) have been paid A right to vote at the annual meeting A limited liability security Dividends are periodic cash flows to share holders 4 Stocks & Stock Market Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO)- First offering of stock to the general public. Seasoned Issue- Sale of new shares by a firm that has already been through an IPO Secondary Market- market in which already issued securities are traded by investors. 5 Stocks & Stock Market Dividend yield- Dividends per share divided by the stock price P/E Ratio- Price per share divided by earnings per share. 6 Values of Stocks Book Value – the value according to the balance sheet in the accounting. Liquidation Value – Net proceeds that would be realized by selling the firm’s assets and paying off its creditors. Market Value – the value according to the traded stock prices in the market. Valuing Common Stocks Stock Valuation Methods 1. Valuation by comparables 2. Price and Intrinsic Value 3. Dividend Discount Model 8 Valuing Common Stocks Expected Return- The percentage yield that an investor forecasts from a specific investment over a set period of time. Sometimes called the holding period return (HPR). Expected Return = = +- r Div P P P 1 1 9 Valuing Common Stocks The formula can be broken into two parts. Dividend Yield + Capital Appreciation Expected Return = = +- r Div P P P P 1 1 10 Valuing Common Stocks 3 3 3 2 2 1 2 2 2 1 1 1 r) (1 P Div r) (1 Div r 1 Div P r) (1 P Div r 1 Div P r 1 P Div P today Price + + + + + + = + + + + = + + = = 11 Valuing Common Stocks Dividend Discount Model- Computation of today’s stock price which states that share value equals the present value of all expected future dividends....
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Chapter 7 - 1 Chapter 7 Valuing Stocks The Application of...

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