Stock Valuation. Learning Goals What is stock valuation model. How to value good and bad stock.

Slides:



Advertisements
Similar presentations
1 CHAPTER FIFTEEN DIVIDEND DISCOUNT MODELS. 2 CAPITALIZATION OF INCOME METHOD THE INTRINSIC VALUE OF A STOCK –represented by present value of the income.
Advertisements

Corporate Finance Stock Valuation Prof. André Farber SOLVAY BUSINESS SCHOOL UNIVERSITÉ LIBRE DE BRUXELLES.
11 CHAPTER FIFTEEN DIVIDEND DISCOUNT MODELS. 22 CAPITALIZATION OF INCOME METHOD THE INTRINSIC VALUE OF A STOCK –represented by present value of the income.
MBA & MBA – Banking and Finance (Term-IV) Course : Security Analysis and Portfolio Management Unit II: Valuation of Securities Valuation of equity shares.
The Value of Common Stocks. Topics Covered  How Common Stocks are Traded  How To Value Common Stock  Capitalization Rates  Stock Prices and EPS 
Common Stock Valuation
CHAPTER SEVENTEEN THE VALUATION OF COMMON STOCK. CAPITALIZATION OF INCOME METHOD n THE INTRINSIC VALUE OF A STOCK represented by present value of the.
Common Stock Valuation
FINANCE 5. Stock valuation - DDM Professor André Farber Solvay Business School Université Libre de Bruxelles Fall 2006.
Stocks and Their Valuation
9-1 CHAPTER 5 Stocks and Their Valuation Features of common stock Determining common stock values Preferred stock.
FIN352 Vicentiu Covrig 1 Common Stock Valuation (chapter 10)
INVESTMENTS: Analysis and Management Second Canadian Edition INVESTMENTS: Analysis and Management Second Canadian Edition W. Sean Cleary Charles P. Jones.
Valuing Stocks Chapter 5.
Chapter 13 Common Stock Valuation Name two approaches to the valuation of common stocks used in fundamental security analysis. Explain the present value.
Stock Valuation The price of stocks in the market place is the present value of the cash flows that stockholders have claim to: These cash flows consist.
Stock Valuation 05/03/06. Differences between equity and debt Unlike bondholders and other credit holders, holders of equity capital are owners of the.
Chapter 8. Security Valuation n In general, the intrinsic value of an asset = the present value of the stream of expected cash flows discounted at an.
Chapter 9 An Introduction to Security Valuation. 2 The Investment Decision Process Determine the required rate of return Evaluate the investment to determine.
Common Stock Valuation
Stocks and Their Valuation
Value of Bonds and Common Stocks
Théorie Financière 4. Evaluation d’actions et d’entreprises
Lecture: 3 - Stock and Bond Valuation How to Get a “k” to Discount Cash Flows - Two Methods I.Required Return on a Stock (k) - CAPM (Capital Asset Pricing.
Lecture 7 The Value of Common Stocks Managerial Finance FINA 6335 Ronald F. Singer.
The Value of Common Stocks Chapter 4. Topics Covered  How Common Stocks are Traded  How To Value Common Stock  Capitalization Rates  Stock Prices.
FINANCE 5. Stock valuation – DDM & FCFM Professor André Farber Solvay Business School Université Libre de Bruxelles Fall 2007.
Théorie Financière Evaluation d’actions et d’entreprises Professeur André Farber.
T HE STOCK MARKET. I NVESTING IN STOCKS Represents ownership Stockholder owns a percentage of interest in firm, consistent with the outstanding stock.
CHAPTER 9 The Cost of Capital
(COMMON STOCK ANALYSIS)
Financial Statement Analysis
8 Common Stock: Characteristics, Valuation, and Issuance ©2006 Thomson/South-Western.
FIN 819: lecture 2'1 Review of the Valuation of Common Stocks How to apply the PV concept.
Investment Planning Investment Planning Valuation of a Firm April 16, 2015 Vandana Srivastava.
Learning Goals Describe the key inputs and basic model used in the valuation process. Review the basic bond valuation model. Discuss bond value behavior,
1 Valuing the Enterprise: Free Cash Flow Valuation Discount estimates of free cash flow that the firm will generate in the future. WACC: after-tax weighted.
Slide 1 Stock Valuation Preferred Stock Features Valuation Expected return on a preferred stock Common Stock Characteristics Valuation – single and multiple.
10/20/20151 HFT 4464 Chapter 7 Common Stock. 7-2 Chapter 7 Introduction  This chapter introduces common stocks including unique features that differentiate.
Slide 7-1 Chapter 7 Stock. Slide 7-2 Differences Between Debt & Equity.
Summary of Last Lecture Future Value of Simple Interest Future Value = Present Value + Interest Amount Interest amount = Principal amount x Interest rate.
1 Stocks (Equity) Characteristics and Valuation What is equity? What factors affect stock prices? How are stock prices determined? How are stock returns.
Analysis of Financial Statements. Learning Objectives  Understand the purpose of financial statement analysis.  Perform a vertical analysis of a company’s.
Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 7 Stock Valuation.
Ch 7 Learning Goals 1.Characteristics of common and preferred stock. 2.Differences between debt and equity. 3.The process of issuing common stock and going.
Ch 7. Valuation of Stocks and Corporations. Goals To understand characteristics of common and preferred stocks To understand stock valuations.
Corporate value model Also called the free cash flow method. Suggests the value of the entire firm equals the present value of the firm’s free cash flows.
Investment in Long term Securities Investment in Stocks.
Chapter 7 Valuing Stocks TOPICS COVERED Stocks and the Stock Market Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income.
Equity Valuation VALUATION BY COMPARABLES  Basic Types of Models ◦ Balance Sheet Models ◦ Dividend Discount Models ◦ Price/Earnings Ratios.
Common Stock Valuation
Chapter 4 Principles of Corporate Finance Eighth Edition Value of Bond and Common Stocks Slides by Matthew Will Copyright © 2006 by The McGraw-Hill Companies,
Chapter 6 Equities. Common Stock Represents ownership of a business entity with claims on earnings and dividends Can have different classes of stock where.
Copyright © 2011 Pearson Prentice Hall. All rights reserved. Chapter 8 Stock Valuation.
Chapter 5 Valuing Stocks. 2 Topics Covered Preferred Stock and Common Stock Properties Valuing Preferred Stocks Valuing Common Stocks - the Dividend Discount.
Introduction to Financial Management FIN 102 – 8 th Week of Class Professor Andrew L. H. Parkes “A practical and hands on course on the valuation and financial.
Stock Valuation. 2 Valuation The determination of what a stock is worth; the stock's intrinsic value If the price exceeds the valuation, buy the stock.
Stock Valuation Jiajun Chen Value the cash flows or earnings under new ownership Value the dividends under the existing management Value the assets.
Cost of Capital Raising funds to pay for capital projects.
Common Stock Valuation
Cost of Equity (Ke).
10 Chapter Valuation and Rates of Return.
Chapter 10 Stock Valuation
Lecture 4 The Value of Common Stocks
Miss Faith Moono Simwami
Lesson 13-2 SHARE OF NET INCOME ASSIGNED TO PREFERRED AND COMMON STOCK
Valuing Stocks -- Summary of Formula
Investments: Analysis and Management Common Stock Valuation
Presentation transcript:

Stock Valuation

Learning Goals What is stock valuation model. How to value good and bad stock

Introduction Purpose – to obtain a standard of performance that can be used to judge the investment merits of a share. It is called stock intrinsic value. It indicates the future risk and return performance of a security. To look at whether a stock is under or over valued are by comparing its intrinsic value and its current market price. Price of a share depends on investor’s expectations about the future behavior of the security. If the outlook for the company and its stock is good, the price will probably be bid up. If the condition is deteriorating, the price of the stock will probably go down.

Value of stock can be determined based on: Par Value - refers to the stated or face value, value of the stock. Book Value - represents the amount of stockholders’ equity in the firm. Market Value / Market Capitalization is simply the prevailing market price of an issue traded in stock exchange. Investment value is determined based on expectations of the return and risk behavior of a stock.

Stock Valuation Model Market Value Approach The company’s capitalization / = number of shares x price per share total market value outstanding Book Value Approach BV per share= Total shareholder’s equity - Preferred shares Common shares outstanding. Asset Value Approach AV= Residual Value_____ Common Stock Outstanding

Price Earning Ratio (P/E) Approach Market Value per Share = Forecasted P/E x Expected EPS Net Tangible Assets (NTA) Approach NTA= total assets of a company Number of share outstanding

Dividend Valuation Model The value of a share is a function of all future dividends it is expected to provide over an infinite time horizon. 3 versions of the dividend valuation model: The zero-growth model - assume that dividends will not grow over time The constant-growth model – assumes that dividends will grow by a fixed/constant rate over time The variables-growth model – which assumes that the rate of growth in dividends varies over time.

Zero Growth Value of a share of stock =Annual dividends Required rate of return P 0 = D 1 k For example, if a stock paid a (constant) dividend of RM 3 a share and you wanted to earn 10% on your investment, the value of the stock would be RM 30 a share (RM 3/0.10 = RM 30) If the capitalization rate goes up to, say 15%, the price of the stock will fall to RM20 (3/0.15)

Constant Growth P 0 = D 0 x (1 + g ) 1 _ + D 0 x (1 + g ) 2 + … + D 0 x (1 + g ) n _ (1+k s ) 1 (1+k s ) 2 (1+k s ) n P 0 =(D 0 x PVIF 1 )+ (D 1 x PVIF 2 ) + ……… + (D n x PVIF n ) P 0 = D 1 = D 0 (1+g) k-g k-g A stock currently pays an annual dividend of RM1.75 a share. Growing at a rate of 8% a year, and you expect they will continue to do so into the future. In addition, you feel that because of the risks involved, the investment should carry a required rate of return of 12%. Given this information: Value of a share of stock= D 0 (1+g) k-g = RM1.75 (1.08) 0.12 – 0.08=RM 47.25

Variable Growth Step 1: D 1 = D 0 x (1 + g 1 ) 1 D 2 = D 1 x (1 + g 1 ) D 3 = D 2 x (1 + g 1 ) ….. D n = D n-1 x (1 + g 1 ) Step 2: P 0 = D 1 _ + D 2 _ + … …+ D n__ (1+k s ) 1 (1+k s ) 2 (1+k s ) n P 0 = (D 1 x PVIF 1,k )+ (D 2 x PVIF 2,k ) + ……… + (D n x PVIF n,k )

Step 3: MP=D n x (1 + g 2 ) n _ x 1__ (k s - g 2 ) (1+k s ) n D n x (1 + g 2 ) n _ x PVIF n,k (k s - g 2 ) Step 4: P o = P o in step 2 + MP in step 3