1. Jeff Cahn & Tom Mrjenovich
Stock Valuation
Jeff Cahn & Tom Mrjenovich

2. Why Own Common Stock? Capital Gains – Increase in stocks price
Dividends – Monthly, quarterly, or yearly payouts of a corporations earnings.
Not all corporations pay dividends

3. Valuation
The stocks price is the present value of the expected future dividends plus the present value of any capital gains.

4. Dividend Discount Models
Zero-Growth Model
Constant-Growth Model
Multiple-Growth Model

5. Zero-Growth Model Assumption- Future dividend payouts remain constant
Infinite Holding Period
V=D1 / k
Finite Holding Period
V= D1 / (1+k)+ D2 / (1+k)2 + … + Dt+Pt/ (1+k)t
V= price of stock, D0= Previous years dividends, Dn= future dividends, k= discount rate, g= dividend growth rate.

6. Example 1
You want to buy xyz corporations stock today. You plan to sell it in 2 years. It will pay a dividend of $2.00 per year over the next two years (at the end of each year). The stock price at the end of year 2 will be $ The discount rate is 8%, how much should you pay for the stock?

7. Solution 1
V= D1 / (1+k)+ D2+P2 / (1+k)2 V=

8. Constant Growth Model
Assumption- Future dividend payouts grow at a constant rate.
Infinite holding period
V=D1 / (k-g)
Finite holding period
V= D1/ (1+k)+ (D1*(1+g)t-1 ) / (1+k)t + … + D1*(1+g) t-1+Pt/ (1+k)t

9. Example 2
You want to buy xyz corporation today. XYZ corporation paid a dividend of $2.00 yesterday. Assuming their dividend will grow 2% per year forever and a discount rate 8%, what is a fair price?

10. Solution 2
V=D1 / (k-g)
D1= D0*(1+g) V=

11. Multiple-Growth Model
Assumption- forecast dividends for the first few years until you believe they will grow at a constant rate. T
V=Σ D1 / (1+k)t+ DT+1 / (k-g)(1+k)t
t=1

12. Example 3
You want to buy xyz corporation stock today. You forecast they will pay a dividend of $2.00 in year 1, $1.50 in year 2, and $3.00 in year 3. From year 3 onwards they will have a growth rate of 2% and a discount rate of 8%. What would you be willing to pay?

13. Solution 3 T
V=Σ D1 / (1+k)t+ DT+1 / (k-g)(1+k)t
t=1 V=

14. Questions?