NETIQUETTE (INTERNET ETIQUETTE)

BASIC FINANCE /
FINANCE

Presented by: Prof. Mary Rose E. Patingo

Image Source: https://thriveglobal.com/stories/significance-of-finance-in-the-operation-of-a-profitable-business/
 STOCKS
ü Valuation of Stocks
ü Pricing of Stocks
ü Stock Market
 VALUATION OF STOCKS
vprocess of determining the
current (or projected) worth of a
stock at a given time period
vmethod of determining
the intrinsic value (or theoretical
value) of a stock
vIt is important because it can be
used to identify whether a stock
is overvalued, undervalued, or is
at market price

Source:
Stock Valuation - Overview, Types, and Popular Methods (corporatefinanceinstitute.com)
What Is Stock Valuation? - Valuation Master Class
TWO MAIN WAYS TO VALUE STOCKS
v ABSOLUTE VALUATION
ü is a method to calculate the present worth of businesses by forecasting their
future income streams
ü involves the analysis of various financial information that can be found in or
derived from a company’s financial statements
ü is calculated through the discounted dividend model (DDM) method and
discounted cash flow (DCF) method where you only focus on the stock and look
at its dividends, cash flow, and growth
v RELATIVE VALUATION
ü is a method that compares a stock value to that of its competitors and peers
within the same industry to assess the stock’s worth
ü main relative valuation ratios include price to free cash flow, enterprise value
(EV), operating margin, price to sales, and price to earnings
üthe best example of relative stock valuation is comparable companies analysis
STOCK VALUATION METHOD
Ø DIVIDEND DISCOUNT MODEL (DDM)
ü allows you to value a company by looking at the sum of all the future dividend
payments that have been discounted back to the net present value
ü based on the assumption that the company’s dividends represent the company’s
cash flow to its shareholders
ü is applicable only if a company distributes dividends regularly and the
distribution is stable
ü Gordon Growth Model (GGM) - assumes that all future dividends will
grow at a constant rate
D0 = D1 ÷ (r – g)
D0 = current value of the stock
D1 = expected dividend payment
r = cost of equity
g = constant growth rate
STOCK VALUATION METHOD
Ø DIVIDEND DISCOUNT MODEL (DDM)
üGordon Growth Model (GGM)
D0 = D1 ÷ (r – g)
D0 = current value of the stock
D1 = expected dividend payment
r = cost of equity
g = constant growth rate

Example: If a company lists its stock price at P500, has a required rate of return at
15% (r), pays a dividend of P10 per share you own, and has a constant growth rate
of 6% then how would you calculate the stock value?
D0 = P10 ÷ (0.15 – 0.06) = P111.11
• Therefore, you would say that the stock price is overvalued as the GGM says that the
stock price should only be P111.11
STOCK VALUATION METHOD
Ø DISCOUNTED CASH FLOW MODEL (DCF)
ü the intrinsic value of a stock is calculated by discounting the company’s free cash
flows to its present value
ü it does not require any assumptions regarding the distribution of dividends
ü it is suitable for companies with unknown or unpredictable dividend distribution

[CF ÷ (1+r)^n]
CF = cash flow
r = interest rate
n = number of periods
STOCK VALUATION METHOD
Ø DISCOUNTED CASH FLOW MODEL (DCF)
[CF ÷ (1+r)^n]
CF = cash flow
r = interest rate
n = number of periods

Example: A company currently has a cash flow of P10,000 and has a

growth rate of 3% for one year, how do you calculate this?
DCF = P10,000 ÷ [(1 + 0.03)^1]
= P9,708.74
• Hence the current value of the cash flow is P9,708.74.
STOCK VALUATION METHOD
Ø COMPARABLE COMPANIES ANALYSIS
ü is an example of relative stock valuation
ü using the company’s fundamentals, the comparable approach aims to derive a
stock’s theoretical price using the price multiples of similar companies
üthe most challenging part is the determination of truly comparable companies
üprice-to-earnings (P/E)
- is calculated by dividing the stock price by its earnings per share (EPS) and is
expressed as a multiple
- a company with a stock of a higher P/E ratio than its peers is considered
overvalued, while a company with a relatively low P/E ratio in comparison to its
stock is considered undervalued
üprice-to-book (P/B)
üenterprise value-to-EBITDA (EV/EBITDA)
PRICING OF STOCKS
Ø STOCK PRICE
ürefers to the current price that a share
of stock is trading for on the market
üan assignment of their value that
ideally reflects the value of the
company itself
üprice of a stock will go up and down in
relation to a number of different
factors, including changes within the
economy as a whole, changes within
industries, political events, war, and
environmental changes

Source:
Stock Price - Definition, Price Changes, How to Determine (corporatefinanceinstitute.com)
WHY STOCK PRICE CHANGES
Ø LAW OF SUPPLY AND DEMAND
üIf a company produces a good that not
many others produce or a good that is
highly desired or necessary, the price of
its stock will climb because the demand
is high.
üWhen the supply of the good balances
out with the demand, stock prices will
tend to plateau.
üIf the supply is greater than the demand,
the company’s share price will likely drop.

Source:
Stock Price - Definition, Price Changes, How to Determine (corporatefinanceinstitute.com)
WHY STOCK PRICE CHANGES
Ø MANAGEMENT OR
PRODUCTION CHANGES
üdepends on how effectively and
efficiently the company is managed
and goods are produced
üchanges to the management team,
style, or how goods are produced can
boost efficiency and thus overall
effectiveness – increasing profits and
causing the share price to rise

Source:
Stock Price - Definition, Price Changes, How to Determine (corporatefinanceinstitute.com)
WHY STOCK PRICE CHANGES
Ø COMPANY’S NAME
ümention of the company’s name in the news,
on social media, or by word of mouth. It is
specifically in regard to one of two events: a
scandal or a success
üScandals – true or untrue – can cause a
company’s share price to drop, simply by
being associated with anything negative. Also,
being connected to, or responsible for, a
breakthrough – either in the market or
respective industry – will usually cause a
stock’s price to increase

Source:
Stock Price - Definition, Price Changes, How to Determine (corporatefinanceinstitute.com)
Source:
How These 8 Company Stocks Fared Following Scandal (wisebread.com)
WHY STOCK PRICE CHANGES

Source:
Stock Price - Definition, Price Changes, How to Determine (corporatefinanceinstitute.com)
STOCK MARKET
Ø refers to the collection of markets and
exchanges where regular activities of
buying, selling, and issuance of shares of
publicly-held companies take place
ØPrimary Market
Øthe stock market allows companies to issue
and sell their shares to the common public for
the first time through the process of initial
public offerings (IPO)
ØSecondary Market
Øthe trading platform that facilitates regular
buying and selling of the listed shares
Source:
Stock Market Definition (investopedia.com)
STOCK PRICE, EARNINGS AND
SHAREHOLDERS
Ø INITIAL PUBLIC OFFERING
§ refers to the process of offering shares of a private corporation to the
public in a new stock issuance
§ Public share issuance allows a company to raise capital from public
investors.
§ The transition from a private to a public company can be an important
time for private investors to fully realize gains from their investment as
it typically includes share premiums for current private investors.
§ Meanwhile, it also allows public investors to participate in the offering

Source:
Initial Public Offering (IPO) Definition (investopedia.com)
ADVANTAGES AND DISADVANTAGES OF
IPO
ØADVANTAGES
§ access to investment from the entire
investing public to raise capital
§ easier acquisition deals (share
conversions)
§ increased transparency that comes
with required quarterly reporting
§ attract and retain better management
and skilled employees
§ increase the company’s exposure,
prestige, and public image, which can
help the company’s sales and profits
Source:
Initial Public Offering (IPO) Definition (investopedia.com)
ØDISADVANTAGES
§ expensive
§ increased time, effort, and attention
required of management for reporting
§ loss of control and stronger agency problems
due to new shareholders who obtain voting
rights and can effectively control company
decisions via the board of directors
§ increased risk of legal or regulatory issues
§ fluctuations in a company's share price can
be a distraction for management
FUNCTIONS OF STOCK MARKET
Ø Fair Dealing in Securities Transactions
üensure that all interested market participants have instant access to data for all
buy and sell orders thereby helping in the fair and transparent pricing of securities
ØEfficient Price Discovery
ü need to support an efficient mechanism for price discovery, which refers to the
act of deciding the proper price of a security and is usually performed by assessing
market supply and demand and other factors associated with the transactions
ØSecurity and Validity of Transactions
üto ensure that all participants are verified and remain compliant with the
necessary rules and regulations, leaving no room for default by any of the parties.
Ensure that all associated entities operating in the market must also adhere to the
rules, and work within the legal framework given by the regulator
Source:
Stock Market Definition (investopedia.com)
FUNCTIONS OF STOCK MARKET
Ø Support All Eligible Types of Participants
üensure that all such participants are able to operate seamlessly fulfilling their
desired roles to ensure the market continues to operate efficiently
ØInvestor Protection
ü must implement necessary measures to offer the necessary protection to such
investors to shield them from financial loss and ensure customer trust
üa stock exchange may categorize stocks in various segments depending on their
risk profiles and allow limited or no trading by common investors in high-risk
stocks
ØBalanced Regulation
üfailure to adhere to the regulations can lead to suspension of trading by the
exchanges and other disciplinary measures
Source:
Stock Market Definition (investopedia.com)
STOCK MARKET PARTICIPANTS
Ø Investors
Ø Stockbrokers - licensed professionals who buy and
sell securities on behalf of investors
Ø Portfolio Managers - professionals who invest
portfolios, or collections of securities, for clients
Ø Investment Bankers - represent companies in
various capacities, such as private companies that want
to go public via an IPO or companies that are involved in
pending mergers and acquisitions
Ø Custodian & Depot Providers - institution
holding customers' securities for safekeeping so as to
minimize the risk of their theft or loss
Source:
Stock Market Definition (investopedia.com)
INVESTING IN STOCKS
Ø MARKET CAPITALIZATION
v refers to the total market value of a company's outstanding shares and is
calculated by multiplying these shares by the current market price of one share
Ø SECTOR
v Global Industry Classification Standard (GICS), which was developed by MSCI and
S&P Dow Jones Indices in 1999 as an efficient tool to capture the breadth, depth,
and evolution of industry sectors.20
v GICS is a four-tiered industry classification system that consists of 11 sectors and
24 industry groups
v this sector classification makes it easy for investors to tailor their portfolios
according to their risk tolerance and investment preference

Source:
Stock Market Definition (investopedia.com)
Global Industry Classification Standard (GICS)
Sectors as of Dec 2019
STOCK MARKET INDICES
Ø Indices represent aggregated prices of a
number of different stocks, and the
movement of an index is the net effect of
the movements of each individual
component
ØA market index is a popular measure of
stock market performance.
ØMost market indices are market-cap
weighted—which means that the weight of
each index constituent is proportional to its
market capitalization while some are price-
weighted
Source:
Stock Market Definition (investopedia.com)
HOMEWORK (INDIVIDUAL)
TOPIC: In 2018, Facebook’s struggles come after a turbulent year
that’s been filled with scandals

Research and analyze why such events affected Facebook’s share price
to drop. Discuss your learnings and how can we relate that as investors.
Write 1 or 2 page essay.
12 font size, double space, Arial

Deadline: November 15, 2023 11:59PM

 MS. MARY ROSE ESCALA PATINGO
PLM e-mail address: mrepatingo@plm.edu.ph
Personal e-mail address: mrose.patingo@gmail.com
Contact # (CP / Viber): 09151505609

Consultation Hour: Wednesday 4PM – 5PM

Thank You
and
Goodnight!
