An equity security represents ownership interest held by shareholders in an entity (a company, partnership, or trust),

realized in the form of shares of capital stock, which includes shares of both common and preferred stock.

VALUING COMMON STOCKS

• Most stocks’ expected total return = dividend yield + capital gains yield.
• The intrinsic value of a stock is the present value of its expected future cash flow stream.
• Dividend growth model
• Free cash flow approach
• Using the multiples of comparable firms

COMMON STOCK VALUATION

What cash flows will a shareholder receive when owning shares of common stock?

1.) Future Dividends

2.) Future Sale of the Common Stock Shares

DIVIDEND VALUATION MODEL

DIVIDEND GROWTH PATTERN ASSUMPTIONS

The dividend valuation model requires the forecast of all future dividends. The following dividend growth rate
assumptions simplify the valuation process.

• Constant Growth
• No Growth
CONSTANT GROWTH MODEL

ZERO GROWTH MODEL

PREFERRED STOCK VALUATION