UB MGF 401 - chap006 (36 pages)

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6 1 Topics Covered Stocks and the Stock Market Book Values Liquidation Values and Market Values Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income Stocks Market Efficiency i e no free lunches on Wall Street Market Anomalies and Behavioral Finance McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 6 2 Terminology of Stocks Public Common Stock Ownership shares in a publicly held corporation Primary Market Place where the sale of new stock first occurs Secondary Market market in which already issued securities are traded by investors 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 McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 6 3 Value of a Stock Book Value Net worth of the firm according to the balance sheet under GAAP Market Value Balance Sheet Financial statement that uses market value of assets and liabilities Liquidation Value Net proceeds that would be realized by selling the firm s assets and paying off its creditors i e S H get what s left over McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 6 4 Simple Models 1 Stock Price discounted future stream of dividends paid to Shareholders where dividend periodic cash distribution from the firm to the shareholders 2 Stock Price discounted future value of corporation where future value is determined using expected cash flows or other estimate of value McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 6 5 Expected Return Expected Return The percentage yield that an investor forecasts from a specific investment over a set period of time Actual Return The percentage yield that an investor actually earns also called the Holding Period Return or HPR Div1 P1 P0 Actual Return r P0 McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 6 6 Valuing Common