Stock Valuation

Question 1

What are the two cashflows types for stocks?

Answer 1

Dividends Resale Value

Question 2

What is the formula for the spot rate on a stock?

Answer 2

ke=D1/S0 + (S1-S0)/S0

Question 3

What is the general formula for the value of a stock?

Answer 3

Question 4

What does the dividend valuation models allow us to do?

Answer 4

Find the current price of a stock based on all future divends.

Question 5

What is the present value of a fixed dividend payment in perpetuity?

Answer 5

S0=D/ke

Question 6

What is the present value of a growing dividend payment in perpetuity?

Answer 6

S0=D1/(ke-g)

Question 7

What is the formula for the risk adjusted rate?

Answer 7

ke=rf + risk*riskpremium

rf is the riskfree rate (we use a short term treasury bill rate)

The risk is the beta of the stock

The riskpremium is the market premium per unit of risk (same for whole market)

Question 8

Name one way to get the risk premium of a market?

Answer 8

Look historically at the risk premium of the market

OR
Find the IRR on one security, then use that to back into the premium