STOCK VALUATION

Geron, Glorioso, Lee, Mojica, Peregrino

BASFIN2 M73

What is STOCK???
a type of security
it represents ownership in a
corporation and claim on
part of a corporations
assets and earnings

Stock Price VS Intrinsic Value

stock price =

intrinsic value

current market price

present value of
expected cash
= flows discounted at
the required rate of
return

Common Stock
a variable-income security
represents equity/ownership
no fixed maturity

Common Stock
Characteristics
limited liability
claim on income
claim on assets
preemptive rights
voting rights

Common Stock
Constant Growth Model
(assuming common stock dividends grow at a constant rate)

D1
Vcs = kcs - g
Vcs = value of common stock
D1 = dividend at the end of period 1
k = required return of common stock
g = dividend growth rate

Common Stock
Expected Return on
Common Stock

D1
+ g
k =
Po

D1 = dividend at the end of period 1

Po = actual market price of stock
g = dividend growth rate

Preferred Stock
a hybrid security
no fixed maturity
a part of equity capital
its similar to a debt

Preferred Stock
Characteristics
cumulative feature
convertibility
adjustable rate
participation
PIK preferred
retirement

Preferred Stock

D
Vps = kps
Vps = value of preferred stock
D = dividends
k = required return of preferred stock