ch 09 - Stocks and Their Valuation Chapter 9 Features of...

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Unformatted text preview: Stocks and Their Valuation Chapter 9 Features of Common Stock Determining Common Stock Values Preferred Stock 9-1 Facts about Common Stock Represents ownership Ownership implies control Stockholders elect directors Directors elect management Managements goal: Maximize the stock price 9-2 Intrinsic Value and Stock Price Outside investors, corporate insiders, and analysts use a variety of approaches to estimate a stocks intrinsic value (P ). In equilibrium we assume that a stocks 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 ). 9-3 Determinants of Intrinsic Value and Stock Prices 9-4 True Risk Perceived Investor Returns Perceived Risk Managerial Actions, the Economic Environment, Taxes, and the Political Climate Stocks Intrinsic Value Stocks Market Price Market Equilibrium: Intrinsic Value = Stock Price Different Approaches for Estimating the Intrinsic Value of a Common Stock Discounted dividend model Corporate valuation model Using the multiples of comparable firms 9-5 Discounted Dividend Model Value of a stock is the present value of the future dividends expected to be generated by the stock. + + + + + + + + = ) r (1 D ... ) r (1 D ) r (1 D ) r (1 D P s 3 s 3 2 s 2 1 s 1 9-6 Constant Growth Stock g r D g r g) (1 D P s 1 s- =- + = 9-7 A stock whose dividends are expected to grow forever at a constant rate, g. D 1 = D (1 + g) 1 D 2 = D (1 + g) 2 D t = D (1 + g) t If g is constant, the discounted dividend formula converges to: Future Dividends and Their Present Values 9-8 t t t ) r 1 ( D PVD + = t PVD P = $ 0.25 Years (t) t t ) g 1 ( D D + = What happens if g > r s ?...
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This note was uploaded on 02/06/2012 for the course ECON 111 taught by Professor Risnit during the Spring '11 term at SUNY Suffolk.

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ch 09 - Stocks and Their Valuation Chapter 9 Features of...

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