Chapter 9

Approaches for valuing common stock

discounted dividend model, discounted FCF model, & multiples

Two sources of cash flows to stockholders

company pays dividends or you sell your shares either to another investor/back to the company

Classified stock

has special provisions for each class, usually involving voting rights and dividend rights

FCF

cash flow available for distribution to all of a company’s investors; generated by a company’s operations

Weighted average cost of capital WACC

overall rate of return required by all of the company’s investors

Multiples used by analysts

P/E ratio, P/CF ratio, P/S ratio, & P/B ratio; valuable for private companies

Preferred stock

equity with priority for dividend and in bankruptcy over common stock; cumulative with no voting rights

Common stock

equity without priority for dividends or claim during bankruptcy; voting rights

The Gordon Growth Model assumes that

dividends grow at a constant rate

Debt security

represents borrowed money which must be repaid by the issuer to the investor by a specified date (maturity date), along with regular interest payments

Intrinsic value of a stock

estimate of a company's "true" worth based on its future cash flows, assets, and earnings, independent of its current market price

Limitations of DDM

not applicable to all companies & unrealistic assumptions to growth

What are the cash flows you might receive if you invest in a stock?

inflows & outflows

Preferred stock valuation

annual dividend divided by required return on preferred stock