The two approaches to valuing common stocks using fundamental security analysis are: Discounted Cash flow techniques. Attempts to estimate the value of a stock today using a present value analysis. Relative valuation techniques. A stock is valued relative to other stocks based on the basis of ratios. | Investments BSC III Winter Semester 2010 Lahore School of Economics Chap 10 Common Stock Valuation Investments Common Stock Valuation Learning Objectives Common Stock Valuation Dividend Growth model Zero Growth Constant Growth Multiple growth model Intrinsic Value & Market price Relative Valuation Techniques (P/E,P/S,P/S) Components of Required Return 2 Capital Market Securities Fixed Income (Bonds) Treasuries Corporates Equities Preferred Stock Common Stock 2 Common Stock It is an equity ownership in a corporation, initially issued to raise capital Points to keep in mind! C/F’s are NOT known in advance Life of stocks is forever – no maturity Difficult to observe required rate of return for discounting 2 Common stock valuation The two approaches to valuing common stock using fundamental security analysis are: Discounted Cash flow techniques Relative valuation techniques Common stock valuation The two approaches to valuing common stocks using fundamental security analysis are: Discounted Cash flow techniques Attempts to estimate the value of a stock today using a present value analysis. Relative valuation techniques A stock is valued relative to other stocks based on the basis of ratios. Key difference! Discounted Cash Flow Techniques The estimated value of a security is equal to the discounted value (Present Value) of the future stream of cash flows that an investor expects to receive from the security: Estimated Value of any security = V0 V0 = Expected Cash Flows/ (1 + K)t Where: K is the appropriated Discount Rate Discounted Cash Flow Techniques To use Discounted Cash flow Model, an investor must: Estimate the amount & timing of future stream of Cash flows. Estimate an appropriate Discount Rate Use these two components in PV Model to estimate the value of the security, which is then compared to the current Market Price of the security. Discounted Cash Flow Techniques Two different approaches to the cash flows & discount rates can be used in the valuation of . | Investments BSC III Winter Semester 2010 Lahore School of Economics Chap 10 Common Stock Valuation Investments Common Stock Valuation Learning Objectives Common Stock Valuation Dividend Growth model Zero Growth Constant Growth Multiple growth model Intrinsic Value & Market price Relative Valuation Techniques (P/E,P/S,P/S) Components of Required Return 2 Capital Market Securities Fixed Income (Bonds) Treasuries Corporates Equities Preferred Stock Common Stock 2 Common Stock It is an equity ownership in a corporation, initially issued to raise capital Points to keep in mind! C/F’s are NOT known in advance Life of stocks is forever – no maturity Difficult to observe required rate of return for discounting 2 Common stock valuation The two approaches to valuing common stock using fundamental security analysis are: Discounted Cash flow techniques Relative valuation techniques Common stock valuation The two approaches to valuing common stocks using fundamental security analysis are: .
