Facts about Common Stocks

•Represents ownership
•Ownership implies control
•Stockholders elect Board of Directors
•Directors elect management
•Management’s goal: Maximize stock price


Intrinsic Value and Stock Price

•Outside investors, corporate insiders, and analysts use a variety of approaches to estimate a stock’s intrinsic value (P0).
•In equilibrium we assume that a stock’s price equals its intrinsic value.
- Outsiders estimate intrinsic value to help determine which stocks are attractive to buy or sell.
-Stocks with a price below (above) intrinsic value are undervalued (undervalued).


Determinants of Intrinsic Value and Stock Prices




Discounted Dividend Model

•Value of a stock is 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.




•If g is constant, the discounted dividend formula converges to:




What happens if g > rs?

•If g > rs, the constant growth formula leads to a negative stock price, which does not make sense.
•The constant growth model can only be used if:
- rs > g
- g is expected to be constant forever.


Use CAPM to Calculate the Required Rate of Return

•If rRF = 7%, rM = 12%, and b = 1.2, what is the required rate of return on the firm’s stock?



Find the Expected Dividend Stream for the Next 3 Years and Their PV’s























Последнее изменение: вторник, 14 августа 2018, 08:49