S12: Stock Valuation Flashcards
Common Stock Valuation
Determined using PV calculations determined by cashflows security is entitled to receive
Dividend Discount Model (DDM)
Equates the intrinsic or “true” value of a stock to the PV of all future dividends paid to the stockholder
1. Dividends over a discrete period
2. Constant dividend growth
3. Multistage growth
Dividends Over a Discrete Period
Rewrites PV formula, V0=P0=(D1+P1)/(1+k)^t
Calculator Steps Dividends Over a Discrete Period
CFo=0
CO1=D1
CO2=D2
COn=Dn+Pn
I=k
Market Efficiency
Price = Value
Undervalued
Price<Value
Overvalued
Price>Value
Constant Dividend Growth
V0=P0=D1/(k-g)
Gordon Growth Model
Divides dividends in next period by required rate of return - growth rate (also used to value preferred stock and dividend aristocrats)
Multistage Growth
V0=P0=(D1/(1+k))+(D2/(1+k)^2)+((D3+D4/(k-g))/(1+k)^3)
Calculator Steps for Multistage Growth
CFo=0
Co1=D1
Co2=D2
Co3=D3+(D4/k-g)
I=k
Undervalued
Current trade price<CPTed value, you should buy
Overvalued
Current trade price > CPTed value, you should sell
Required Rate of Return (k)
Return investors require from an investment in order for them to commit to it given its level of risk, used to discount dividends -> k=(D1/P0)+g
Capital Gains Yield (g)
Expectation that a security’s price will grow beyond original purchase price
