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Features of common stock Determining common stock values Efficient markets Preferred stock.
Liquidation value is the total worth of company’s asset if it were to go out of business and. Claim on
assets and cash flow senior to common stock As equity security, dividend payments are not tax
deductible for the corporation. Features of common stock Determining common stock values
Efficient markets Preferred stock. May not be scanned, copied, or duplicated, or posted to a publicly
accessible website, in whole or in part. What Is Stock? Consumables Items used by the Business
which are not Intended for resale, an Office may have a stock Of paper or envelopes Finished Goods
A stock of finished Goods may be built up By the producer Used for the calculation For cost of
sales. A share of common stock is more difficult to value in practice than a bond because. Uncertain
cash flows Equity is the residual claim on the firm’s cash flows Life of the firm is forever Rate of
return (the appropriate discount rate) is not easily observed. Thus, the growth rate will start to decline
until dividend start to grow at a constant rate. The market price does not always reflect the PV of
FCF. Kalanje, Consultant, Creative Industries Division, WIPO. Cash Flows for Shareholders 8.1. If
you buy a share of stock, you can receive cash in two ways Dividends Selling your shares.
Calculating Free Cash Flow in 5 Easy Steps Step 1 Step 2 Earning before interest and taxes
Operating current assets X (1. Represents ownership Ownership implies control Stockholders elect
directors Directors elect management. Understand how stock prices depend on future dividends and
dividend growth Be able to compute stock prices using the dividend growth model Understand how
growth opportunities affect stock values Understand valuation comparables. Why? (c) Use the
dividend model to calculate the stock price? (d) What have you found? (e) Think about why you
have this kind of result. Cash Flows for Shareholders 8.1. If you buy a share of stock, you can
receive cash in two ways Dividends Selling your shares. Spring Semester 2010 Dr. Isabel Tkatch
Assistant Professor of Finance. May not be scanned, copied, or duplicated, or posted to a publicly
accessible website, in whole or in part. The payments of the firm to the holders of these securities are
in the form of dividends. There are three methods used for valuation of stock: FIFO: First in, first
out LIFO: Last in, first out AVCO: Average cost. In turn, this ensures Reliability in our reports,
because our valuation will be free from bias. To evaluate the most appropriate method of stock
valuation. Stock valuation. Usually the cost of stock is lower than its net realisable value. If you buy
a share of stock, you can receive cash in two ways The company pays dividends You sell your shares,
either to another investor in the market or back to the company. Features of common stock
Determining common stock values Preferred stock. Total net operating capital last year Net
investment in operating capital Free cash flow Calculating OFCF (Gross of Dep.) Alternative Method
(Net of depreciation) Alternative Method to Calculating OFCF CAPEX is the additional investment
in long-term operating assets. Understand how stock prices depend on future dividends and dividend
growth Be able to compute stock prices using the dividend growth model Understand how corporate
directors are elected Understand how stock markets work. Represents ownershipOwnership implies
controlStockholders elect directorsDirectors elect managementManagement's goal: Maximize the
stock price. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in
whole or in part.
The net worth of the Company A is Rs. 27 million and the number of outstanding equity. Understand
how stock prices depend on future dividends and dividend growth. The long-term funds of a firm;
all items on the right-hand side of the firm’s balance sheet. Finding the solution FIFO She has
purchased 300 copies of the book, 100 in week 1 and 200 in week 2. Represents
ownershipOwnership implies controlStockholders elect directorsDirectors elect
managementManagement's goal: Maximize the stock price. May not be scanned, copied, or
duplicated, or posted to a publicly accessible website, in whole or in part. Arbitrage Restrictions on
the Values of Options Quantitative Pricing Models Binomial model A formula in the simple case An
algorithm in the general case. Uncertain cash flows Equity is the residual claim on the firm’s cash
flows Life of the firm is forever Rate of return (the appropriate discount rate) is not easily observed.
You predict the stock will worth Rs. 70 at that time with. In case of insolvency and bankruptcy,
common shareholders are the last one to recover the. Spring Semester 2010 Dr. Isabel Tkatch
Assistant Professor of Finance. However, earnings after that will start to increase rapidly (growth
opportunities). Understand how stock prices depend on future dividends and dividend growth Be
able to compute stock prices using the dividend growth model Understand how corporate directors
are elected Understand how stock markets work. May not be scanned, copied, or duplicated, or
posted to a publicly accessible website, in whole or in part. Why? (c) Use the dividend model to
calculate the stock price? (d) What have you found? (e) Think about why you have this kind of
result. An example of stock valuation Sue’s Bookstore is making a stock valuation for the title
“Accounting Concepts and Principles” In week 1 she bought 100 copies at ?2-00 and sold 80 copies
at ?3-50p In week 2 she bought 200 copies at ?2-10 and sold 160 copies at ?3-75 What is the value of
her stock at the end of week 2. Note, that for the first 3 years OFCF grows at a non-constant rate.
Auditors may visit a business and audit stock and cash on the premises At any time, without warning.
Features of common stock Determining common stock values Efficient markets Preferred stock.
Value realised from liquidation of all the assets. The stock valuation then is made on only the most
recent stock. Understand how stock prices depend on future dividends and dividend growth Be able
to compute stock prices using the dividend growth model Understand how corporate directors are
elected Understand how stock markets work. May not be scanned, copied, or duplicated, or posted
to a publicly accessible website, in whole or in part. Understand how stock prices depend on future
dividends and dividend growth Be able to compute stock prices using the dividend growth model
Understand how growth opportunities affect stock values Understand valuation comparables. Debt
securities offer fixed or floating cash flows. The payments of the firm to the holders of these
securities are in the form of dividends. These methods are grouped into two categories: Dividend
discount models Price ratio models Most importantly: Fundamental Analysis. May not be scanned,
copied, or duplicated, or posted to a publicly accessible website, in whole or in part. Bondholders
don’t have any control over how the company is run.
Illustration: If a stock paid a (constant) dividend of Rs. 80 a share and one wanted to earn 8% on
the. What are the fundamentals of security evaluation.( RRR, time, and size of CFs ) The Discount
Cash Flow models to evaluate common stock. May not be scanned, copied, or duplicated, or posted
to a publicly accessible website, in whole or in part. Claim on assets and cash flow senior to common
stock As equity security, dividend payments are not tax deductible for the corporation. Kalanje,
Consultant, Creative Industries Division, WIPO. Features of common stock Determining common
stock values Efficient markets Preferred stock. May not be scanned, copied, or duplicated, or posted
to a publicly accessible website, in whole or in part. May not be scanned, copied, or duplicated, or
posted to a publicly accessible website, in whole or in part. Uncertain cash flows Equity is the
residual claim on the firm’s cash flows Life of the firm is forever Rate of return (the appropriate
discount rate) is not easily observed. Spring Semester 2010 Dr. Isabel Tkatch Assistant Professor of
Finance. Thus, the firm could initiate dividends, but that dividend may grow at a fast rate.
Understand how stock prices depend on future dividends and dividend growth Be able to compute
stock prices using the dividend growth model Understand how corporate directors are elected
Understand how stock markets work. Features of common stock Determining common stock values
Efficient markets Preferred stock. Represents ownership Ownership implies control Stockholders
elect directors Directors elect management. Represents ownership Ownership implies control
Stockholders elect directors Directors elect management Management’s goal: Maximize the stock
price. The reason for assuming such assumption is that Usually new firms will have low or negative
earnings for several years due to high investments in fixed and working capital. The market price
does not always reflect the PV of FCF. They elect the firm’s board of directors who in turn appoint
the firm’s top management team. The payments of the firm to the holders of these securities are in
the form of dividends. Understand how stock prices depend on future dividends and dividend
growth Be able to compute stock prices using the dividend growth model Understand how corporate
directors are elected Understand how stock markets work. Methods for valuing common stock
Preferred stock We WILL cover Sections 9-1 through 9-5 (pages 269-283) and Section 9-8
(Preferred Stock, pages 291-292). It makes the assumption that the first stock received will be the
first that is sold. Understand how stock prices depend on future dividends and dividend growth.
Using fundamental analysis, there are two techniques Discounted cash flow techniques Dividend
Discounted Model (Income Method) Free Cash flow to equity (Cash Flow Analysis) Free Cash flow
to firm (Cash Flow Analysis). If you buy a share of stock, you can receive cash in two ways The
company pays dividends You sell your shares, either to another investor in the market or back to the
company. Understand how stock prices depend on future dividends and dividend growth Be able to
compute stock prices using the dividend growth model Understand how corporate directors are
elected Understand how stock markets work. Instead, we decide to plow back 40% of the earnings
at the firm’s current return on equity of 20%. A share of common stock is more difficult to value in
practice than a bond because. This will provide investors with a 12% expected return. Spring
Semester 2010 Dr. Isabel Tkatch Assistant Professor of Finance.
Uncertain cash flows Equity is the residual claim on the firm’s cash flows Life of the firm is forever
Rate of return (the appropriate discount rate) is not easily observed. Features of common stock
Determining common stock values Preferred stock. Debt securities offer fixed or floating cash flows.
May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in
part. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole
or in part. Then when the firms matures and its earnings stabilized its earnings will grow at a
constant rate. Spring Semester 2010 Dr. Isabel Tkatch Assistant Professor of Finance. To evaluate the
most appropriate method of stock valuation. To be able to state the difference between FIFO and
AVCO methods of valuation. May not be scanned, copied, or duplicated, or posted to a publicly
accessible website, in whole or in part. Price to Sales Ratio: Price to Sales Ratio compares the price
of a share to the revenue per share. Preferred Stock. A hybrid security: It’s like common stock - no
fixed maturity. Understand how stock prices depend on future dividends and dividend growth Be
able to compute stock prices using the dividend growth model Understand how corporate directors
are elected Understand how stock markets work. Also, the firm has 40 million in total debt and
preferred stock and has 10 million shares common stock outstanding. How does an investor conduct
fundamental analysis on a company stock. Recent period: very large movements in potential holding
gains of households 2001-2006: Increase in housing prices. Features of common stock Determining
common stock values Preferred stock. Stock valuation. Usually the cost of stock is lower than its net
realisable value. Claim on assets and cash flow senior to common stock As equity security, dividend
payments are not tax deductible for the corporation. Stock should be valued at the lower of its cost
and net realisable value (NRV) (IAS 2) was (SSAP9). May not be scanned, copied, or duplicated, or
posted to a publicly accessible website, in whole or in part. Understand how stock prices depend on
future dividends and dividend growth Be able to compute stock prices using the dividend growth
model Understand how growth opportunities affect stock values Understand valuation comparables.
The underlying asset is a stock that pays no dividends before expiration. In turn, this ensures
Reliability in our reports, because our valuation will be free from bias. Introduction. The valuation of
all financial securities is based on the expected PV of future cash flows. May not be scanned, copied,
or duplicated, or posted to a publicly accessible website, in whole or in part. Represents ownership
Ownership implies control Stockholders elect directors Directors elect management Management’s
goal: Maximize the stock price. All long-term borrowing incurred by a firm, including bonds.
However, that growth rate is unlikely to continue forever.
Outside investors, corporate insiders, and analysts use a variety of approaches to estimate a. Market
Value Balance Sheet - Financial statement that uses market value of assets and liabilities. All long-
term borrowing incurred by a firm, including bonds. Represents ownershipOwnership implies
controlStockholders elect directorsDirectors elect managementManagement's goal: Maximize the
stock price. Separate yourself from the commoners by having a good Understanding of these security
valuation methods: 1. Features of common stock Determining common stock values Preferred stock.
May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in
part. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole
or in part. These methods are grouped into two categories: Dividend discount models Price ratio
models Most importantly: Fundamental Analysis. May not be scanned, copied, or duplicated, or
posted to a publicly accessible website, in whole or in part. Understand how stock prices depend on
future dividends and dividend growth Be able to compute stock prices using the dividend growth
model Understand how corporate directors are elected Understand how stock markets work. Our
goal in this chapter is to examine the methods commonly used by financial analysts to assess the
economic value of common stocks. May not be scanned, copied, or duplicated, or posted to a
publicly accessible website, in whole or in part. Understand how stock prices depend on future
dividends and dividend growth Be able to compute stock prices using the dividend growth model
Understand how corporate directors are elected Understand how stock markets work. Preferred
shareholders are paid off before he common shareholders during insolvency and. To be able to state
the difference between FIFO and AVCO methods of valuation. Zero Growth Model assumes that
dividend stay the same year in and year out, and they are. May not be scanned, copied, or
duplicated, or posted to a publicly accessible website, in whole or in part. Understand how stock
prices depend on future dividends and dividend growth Be able to compute stock prices using the
dividend growth model Understand how corporate directors are elected Understand how stock
markets work. Understand how stock prices depend on future dividends and dividend growth Be
able to compute stock prices using the dividend growth model Understand how corporate directors
are elected Understand how stock markets work. May not be scanned, copied, or duplicated, or
posted to a publicly accessible website, in whole or in part. Uncertain cash flows Equity is the
residual claim on the firm’s cash flows Life of the firm is forever Rate of return (the appropriate
discount rate) is not easily observed. Fall Semester 2009 Dr. Isabel Tkatch Assistant Professor of
Finance. Suppose appropriate capitalization rate for AAA-rated corporate bonds is 12%, compounded
semiannually. Illustration: The current dividend on an equity share of x is 2. May not be scanned,
copied, or duplicated, or posted to a publicly accessible website, in whole or in part. The average cost
of the items purchased is calculated at the end of the period. Spring Semester 2010 Dr. Isabel Tkatch
Assistant Professor of Finance. Understand how stock prices depend on future dividends and
dividend growth Be able to compute stock prices using the dividend growth model Understand how
growth opportunities affect stock values Understand valuation comparables. Understand how stock
prices depend on future dividends and dividend growth.
Represents ownership Ownership implies control Stockholders elect directors Directors elect
management. VALUE STOCK AT SELLING PRICE (NRV) YES VALUE STOCK AT COST
PRICE NO Important. Spring Semester 2010 Dr. Isabel Tkatch Assistant Professor of Finance.
Features of common stock Determining common stock values Efficient markets Preferred stock.
They elect the firm’s board of directors who in turn appoint the firm’s top management team. May
not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
The spot market Forward Contracts Definition Pricing Futures Contracts Definition The role of the
clearinghouse Margin accounts. Introduction. The valuation of all financial securities is based on the
expected PV of future cash flows. Financial asset: a security (e.g. a share of stock or bond) that
represents a claim against the future income or assets of issuer. May not be scanned, copied, or
duplicated, or posted to a publicly accessible website, in whole or in part. Stock valuation. Usually
the cost of stock is lower than its net realisable value. Illustration: The current dividend on an equity
share of x is 2. Arbitrage Restrictions on the Values of Options Quantitative Pricing Models Binomial
model A formula in the simple case An algorithm in the general case. Outside investors, corporate
insiders, and analysts use a variety of approaches to estimate a. Claim on assets and cash flow senior
to common stock As equity security, dividend payments are not tax deductible for the corporation.
Represents ownership Ownership implies control Stockholders elect directors Directors elect
management Management’s goal: Maximize the stock price. May not be scanned, copied, or
duplicated, or posted to a publicly accessible website, in whole or in part. May not be scanned,
copied, or duplicated, or posted to a publicly accessible website, in whole or in part. The payments
of the firm to the holders of these securities are in the form of dividends. Methods for valuing
common stock Preferred stock We WILL cover Sections 9-1 through 9-5 (pages 269-283) and
Section 9-8 (Preferred Stock, pages 291-292). Presented By: Tehmina Tabassum Nimra Rasheed
Samiya Shahid Javeria Khalid Nabeela Sarfraz MBA- 16. If you buy a share of stock, you can
receive cash in two ways The company pays dividends You sell your shares, either to another
investor in the market or back to the company. Derivative securities are financial contracts that
derive their value from other securities. Spring Semester 2010 Dr. Isabel Tkatch Assistant Professor
of Finance. Subtract MV of firm’s debt and preferred stock to get MV of common stock. Be able to
reconcile stock values with actual stock Starter Activity Work-In-Progress Stock that is currently in
the Production process, may take Weeks to become a finished product Raw materials and
components Stock purchased before production. Then when the firms matures and its earnings
stabilized its earnings will grow at a constant rate. Separate yourself from the commoners by having
a good Understanding of these security valuation methods: 1. Stock valuation. Usually the cost of
stock is lower than its net realisable value. Fall Semester 2009 Dr. Isabel Tkatch Assistant Professor
of Finance.