Lecture "Fundamentals of finance management - Chapter 8: Stocks and their valuation" has contents: Facts about common stock, social/ethical question, types of stock market transactions,. and other contents. | CHAPTER 8 Stocks and Their Valuation Features of common stock Determining common stock values Efficient markets Preferred stock Facts about common stock Represents ownership Ownership implies control Stockholders elect directors Directors elect management Management’s goal: Maximize the stock price Social/Ethical Question Should management be equally concerned about employees, customers, suppliers, and “the public,” or just the stockholders? In an enterprise economy, management should work for stockholders subject to constraints (environmental, fair hiring, etc.) and competition. Types of stock market transactions Secondary market Primary market Initial public offering market (“going public”) Different approaches for valuing common stock Dividend growth model Corporate value model Using the multiples of comparable firms Dividend growth model Value of a stock is the present value of the future dividends expected to be generated by the stock. Constant growth stock A stock whose dividends are expected to grow forever at a constant rate, g. D1 = D0 (1+g)1 D2 = D0 (1+g)2 Dt = D0 (1+g)t If g is constant, the dividend growth formula converges to: Future dividends and their present values $ Years (t) 0 What happens if g > ks? If g > ks, the constant growth formula leads to a negative stock price, which does not make sense. The constant growth model can only be used if: ks > g g is expected to be constant forever If kRF = 7%, kM = 12%, and β = , what is the required rate of return on the firm’s stock? Use the SML to calculate the required rate of return (ks): ks = kRF + (kM – kRF)β = 7% + (12% - 7%) = 13% If D0 = $2 and g is a constant 6%, find the expected dividend stream for the next 3 years, and their PVs. D0 = ks = 13% g = 6% 0 1 2 3 What is the stock’s market value? Using the constant growth model: What is the expected market price of the stock, one year from now? D1 will have been paid out already. So, P1 is the . | CHAPTER 8 Stocks and Their Valuation Features of common stock Determining common stock values Efficient markets Preferred stock Facts about common stock Represents ownership Ownership implies control Stockholders elect directors Directors elect management Management’s goal: Maximize the stock price Social/Ethical Question Should management be equally concerned about employees, customers, suppliers, and “the public,” or just the stockholders? In an enterprise economy, management should work for stockholders subject to constraints (environmental, fair hiring, etc.) and competition. Types of stock market transactions Secondary market Primary market Initial public offering market (“going public”) Different approaches for valuing common stock Dividend growth model Corporate value model Using the multiples of comparable firms Dividend growth model Value of a stock is the present value of the future dividends expected to be generated by the stock. Constant growth stock A stock whose .
