Stock Valuation

Differences b/w Debt and Equity

Capital Long term funds of the company

Debt Capital All long term funds incurred by a firm (including bonds)

Equity Capital The long-term funds provided the firm’s owners,

the stock holders.
Rights of shareholders:
(1)Limited liability
(2)Proportionate ownership
(3)Transfer rights
(4)Receiving dividends
(5)Inspecting corporate books
(6)Pre-emptive right
(7)Voting at shareholder meetings
(8)Residual claims to assets at dissolution
Book value vs. Market value
 Single Period Stock Valuation
Model

Where,
D1 = Expected Dividend at the end of year 1
P1 = Price of stock after a year
Ks = Required rate of return on stock
 The Common Stock Valuation
Equation

D1 D2 Dn
P0    ... 
(1  k s )1
(1  k s ) 2
(1  k s ) n

P0  value of the stock

Dn  Per share dividend exp ected at the end of year ' n'
k s  Re quired return on common stock
 Zero Growth
Model
 It is an approach to dividend valuation that assumes a constant,
non-growing dividend stream.

D1  D2  ...  D

D1
Current price of the
Stock, P0 
ks
 Constant Growth Model
 A widely used dividend model that assumes dividends will grow at
a constant rate, but a rate that is less than the required return.

D0  (1  g )1 D0  (1  g ) 2 D0  (1  g ) 
P0    ... 
(1  k s )1
(1  k s ) 2
(1  k s ) 
which alternatively can be written as,

D1
P0 
ks  g