CASE 15 PACIFIC HEALTHCARE (B) (Stock Valuation) Introduction

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Presentation transcript:

CASE 15 PACIFIC HEALTHCARE (B) (Stock Valuation) Introduction 3 Key Learning Points (KLPs)

Copyright 2014 Health Administration Press Introduction This case is designed to provide you with an overview of stock valuation. Because it focuses on basic concepts, no spreadsheet model is provided. Students are expected to solve the problems by using a financial calculator or by constructing their own spreadsheets. Copyright 2014 Health Administration Press

KLP 1: The constant growth model is highly sensitive Small changes in assumptions about risk or dividend growth rates would significantly change the estimated value. Copyright 2014 Health Administration Press

KLP 2: The estimated value of a stock varies among investors Each investor has his or her own assessment of a stock’s riskiness and dividend stream. Copyright 2014 Health Administration Press

Copyright 2014 Health Administration Press KLP 3: Only a few “real world” stocks satisfy the constant growth assumptions Constant growth model assumes that dividends grow at some constant rate forever. This implies that the company’s earnings (and its sales and assets) also grow at that same constant rate and that the payout remains constant. Clearly, no real world stocks meet the constant growth assumptions on an ex post basis; but ex ante, the assumption is not unreasonable for some mature companies. Copyright 2014 Health Administration Press

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