Dividends

Equity

Interest rate risk - Long term investments are of higher risk compared to short term investments.

Default risk is the risk investor take ,it means they might not get the payments back.

Government bonds are safer than cooperate bonds.

Equity is the attributable to the owners of a business.

Equity holders are at the bottom of the pay out priority list.

Common stock - ownership shares in a publicly held cooperation.

P/E Ratio - Price per share divided by earnings per share.

Equity book value - Net worth of the firm according to the balance sheet

Liquidation value - Net proceeds that would be realized after selling al of the firms assets and paying off any outstanding obligations.

Market Value - the price the share is trading at on the stock market

Thre fundamental steps to value a common stock

• Cash flow assessment - Estimate the amount and timing of future cash flows of the stock is expected to provide.

• Risk assessment - Evaluate the riskiness of future dividends and determine the rate of return an investor would expect to receive grin a comparable investment.

• Present value equals price - calculate the PV of expected future cash- flows using the stocks rate of return.

Expected return = r = Div1 + P1 - P0 / P0

It also equals = Dividend yield + capital Appreciation

The expected return of equity investors is also known as a the cost of capital to the firm raising funds

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When valuing common stock using cash flow assessment contd

Return on equity = ROE

= EPS / Book equity per share

EPS stands for equity per share. It is the amount of income generated per share

Book equity per share is the amount of capital invested per share

ROE tells us how much income the company made based on how much capital they invested, backward looking measure.

This might not work with private companies, startups so we need another strategy. Valuation by comparables.

Identify similar firms per industry as potential comparables and then examine

Price / Earning ratio, what investors pay per dollar of earnings

Price / Book Ratio, What investors pay per dollar of book value

Real interest rate = ( 1 + Nominal interest rate) / (1 + inflation rate) - 1

Payout ratio = Dividends / Earnings * 100

Plowback ratio = 1 - dividend paid out

Free cash flow is the amount of cash left over and available to pay out to investors after all investments necessary for growth.

Horizon value is the value of a firm at the end of a forecast period.