Stock Valuation. Stocks are financial assets Value derived from future cash flows Equation for any financial asset.

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Presentation transcript:

Stock Valuation

Stocks are financial assets Value derived from future cash flows Equation for any financial asset

Life of a stock is indefinite Dividend stream could go on forever How does our equation change to handle this? (Dividend discount model)

Assumptions of the DDM g is constant Stock price also grows at g R must be greater than g

Examples of the DDM

What about stocks that don’t pay dividends? Can we still use the DDM to value these stocks? What changes need to be made?

Two ways to make money by owning stocks Dividends – DY Price change – CGY R = DY + CGY

Non-constant growth Five steps Examples