4.chapter 8 - Stock Valuation
4.chapter 8 - Stock Valuation
4.chapter 8 - Stock Valuation
Stock Valuation
Prepared By :DR. Wael Shams EL-Din
Key Concepts
❑ What is Preferred Stock
❑ Value of Preferred Stock
❑ Common Stock
❑ Value of common stock
✓The Holding Period is one year
✓The Holding Period is more than one year
✓The Holding Period is unknown
Type of Stocks
Value = Dividends
RRR
P= 10 = $ 125
0.08
P= 10 = $ 83.33
0.12
Common Stocks
The Problem of a common stock is that the
amount of dividends, earning or cash flow
of return is not fixed and there is no
maturity, therefore we need to set several
assumptions related to the holding period of
the investment and cash flow that we may
receive during that period.
1) The Holding Period is one year
2) The Holding Period is more than one year
3) The Holding Period is unknown
The Holding Period is one year
The cash that may be received at
the end of the year is known as
dividend and selling price of that
stock will be at the end of same
year.
Example (5)
XYZ Company has a share that is
expecting to pay $1 dividend next
year and to be sold at $30 by the
end of that year, what is the value
of XYZ stock if the required rate of
return is 14%.
Answer
Today Dividend (D1)= $ 1
Selling Price = $ 30
---------
FV $ 31
Price (PV) = FV
1+RRR
Selling Price 40
Value = Dividends
RRR- g
P0 = D1
RRR-g
g→ Growth Rate
P= 3 = $ 30
0.15-0.05
Example (8)
ABC’s share is expecting to pay $ 2
dividends next year while it is expected to
have a constant growth rate for 10 %
annually for the coming 2 years then it will
fall to 4 % constantly, what is the value of
ABC stock if the required rate of return is
14%.
Answer
Y0 Y1 Y2 Y3 Y4