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Unformatted text preview: IMSE3010 Financial Engineering Lecture 4 Common Stocks iscrete Time Market Model Discrete Time Market Model Miao Song Dept of Industrial & Manufacturing Systems Engineering eview of Lecture 3 Review of Lecture 3 FixedIncome Assets YieldToMaturity Forward Interest Rates Risk Associated with Bonds Common Stocks troduction to Stock Markets Introduction to Stock Markets 2/1/2011 2 2/1/2011 2 genda Agenda Common Stocks Introduction to Stock Markets Discounted Cash Flow Model Modeling Cash Flows g EPS, P/E and Growth Opportunity iscrete Time Market Model Discrete Time Market Model 2/1/2011 3 2/1/2011 3 troduction To Stock Markets Introduction To Stock Markets What is common stock? Organization of Stock Market Primary Market: VC, IPO, Secondary Offering Secondary Market: exchanges, OTC Trading in Secondary Market Trading cost ommission Commission Bidask spread Price impact Buy on margin Long and short 2/1/2011 4 2/1/2011 4 genda Agenda Common Stocks Introduction to Stock Markets Discounted Cash Flow Model odeling Cash Flows Modeling Cash Flows EPS, P/E and Growth Opportunity Discrete Time Market Model 2/1/2011 5 2/1/2011 5 Discounted Cash Flow Model (DCF) DCF: Stock price is the present value of future dividend Inputs Expected future dividend D t : Expected future dividend r t : Riskadjusted discount rate for cash flow at t Let P denote the expected stock price at t (exdividend) t What is P if you hold the stock forever? Additional assumption: r t = r 2/1/2011 6 2/1/2011 6 Valuation Based on Finite Holding Period hat is P you sell the stock at t = 1? What is P if you sell the stock at t = 1?...
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This note was uploaded on 12/09/2011 for the course IMSE 0301 taught by Professor Song during the Spring '11 term at HKU.
 Spring '11
 SONG

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