HB 311 1st Edition Lecture 11 Valuation of Stock Pt 1 Common Stock Background Stockholders own the corporation but in many instances the corporation is widely held Stock ownership is spread among a large number of people Most equity investors aren t interested in a role as owners Because of this most stockholders are only interested in how much money they will receive as a stockholder Dividends Capital Gains The future cash flows associated with stock ownership consists of Dividends The eventual selling price of the shares If you buy a share of stock for price P0 hold it for one year during which time you receive a dividend of D1 then sell it for a price P1 you return k would be The Nature of Cash Flows from Stock Ownership For stockholders Expected dividends and future selling price are not known with any precision When selling investor receives money from another investor For bondholders These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Interest payments are guaranteed constant Maturity value is fixed At maturity the investor receives face value from the issuing company The Basis of Value The basis for stock value is the present value of expected cash inflows even though dividends and stock prices are difficult to forecast Must make assumptions about what the future dividends and selling price will be Discount these assumptions at an appropriate interest rate The Intrinsic Value and Market Price A stock s intrinsic value is based on assumptions made by a potential investor About future cash flows by analyzing the firm and the industry Known as Fundamental Analysis Analysts who follow particular stocks base recommendations to buy sell hold on this type of analysis Different investors with different cash flow estimates will have different intrinsic values
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