Corporate Finance Professional Certificate MOOC

Course 1, Introduction to Corporate Finance MOOC

Module 4, Stocks
Stock Terminology Growth Rates, Models, & Formulas
Stock Constant Dividend Growth Model -or-
A stock represents ownership in a corporation. Gordon Growth Model
Stocks = Shares
Stockholder 𝐷𝐼𝑉L
𝑃I =
Someone who owns stock in a corporation. A 𝑟M − 𝑔
stockholder is entitled to earnings of a company
P0 = Current Price
after all obligations are paid.
DIV1 = Dividend in year 1
Limited Liability rE = cost of equity
A person with limited liability cannot lose more g = Constant Growth Rate
than their investment.
Preferred Stock Earnings per Share (EPS)
Stock that entitles the holder to a fixed The profits of the firm divided by the number
dividend, whose payment takes priority over of shares.
that of common-stock dividends. Retention Ratio (b)
Dividend The fraction of earnings a firm retains for
A sum of money paid by a company to its investment
shareholders out of its profits Payout ratio (1-b)
Dividend per share The fraction of earnings a firm pays out. If
𝐴𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 a firm only pays dividends, then
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠 𝑫𝑰𝑽𝟏 = (𝟏 − 𝒃) ∗ 𝑬𝑷𝑺𝟏
Revenue per share DIV1 = Dividend at 1-Year
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑜𝑓 𝐹𝑖𝑟𝑚 b = Retention Ratio
EPS1 = Earnings per Share at 1-Year
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠
Price of a Stock Formula
Reinvestment Rate of Return (RIR)
The rate of return equity holders get on new
𝑫𝑰𝑽𝟏 𝑫𝑰𝑽𝟐 𝑫𝑰𝑽𝑻
𝑷𝟎 = + + ⋯ + investments
𝟏 + 𝒓𝑬 (𝟏 + 𝒓𝑬 )𝟐 (𝟏 + 𝒓𝑬 )𝑻 Formula for Growth Rate (g)
P0 = current price 𝑔 = 𝑏 ∗ 𝑅𝐼𝑅
DIVt = Dividend in year t g = Growth Rate
rE = opportunity cost of equity capital, or cost of equity b = Retention Ratio
RIR = Reinvestmant Rate of Return
Note: DIVt, is not certain, but should be entered based
on what investors expect its value to be in the future
p son ve p0 ı bilemediğimizden dolayı formulü sonsuza
uzatıyoruz ( sonsuzdaki son p değeri 0 kabul edilir ztn)