2.0 Common stock valuation
Common stock represents ownership of the corporation. So the common stockholders are the owners of the firm. They elect the firm’s board of directors, who in turn appoint the firm’s top management team. The firm’s management team then carries out the day-to-day management of the firm.
Characteristics of common stock Does not have maturity date, but exist as long as the firm’s does. Nor does common stock have an upper and lower limit on its dividend payments. Market efficiency
Buyers and sellers use their assessment of an asset’s risk and return to determine its value. For a buyer asset value represents the maximum price that he or she would pay to acquire that and for seller the asset’s value as a minimum sale …show more content…
The result of future growth rates will shift upwards or downwards as affected present of alternate in assumption. Usually, initial growth will present as g1 and rate after shift as g2. The main purpose for this valuation model is present framework for estimated or evaluated the stock value. But, the result not clearly exact because the future growth and discount rates just roughly amount. So that, in applied this model, the rates must be nearest rounded to tenth of percent.
Free Cash Flow Valuation Model
Free cash flow valuation model as another method to estimate the firm’s value. This model will proceed when the firm does not have any dividend history like they just want to start the business or valued the larger public company as they have an operating unit or division.
This valuation model is same basic with model of dividend valuation as all future cash flow represents the value of common stock. The amount of cash flow is accessible to those who are invest and all needed obligation have met.
This model was estimate by defined present value of its expected cash flow discounted as its WACC (weighted average cost of capital) which fund costs over long term. As the forecast is difficult to find so only 5 years are relevant to use in estimate specific annual …show more content…
Changes In The Expected Return
When the economic conditions become stable, the firm’s value should increase since dividend expectation was raise by current and prospective stockholders. Financial manager should act if they think that particular would increase the level of expected return without changing risk because it can positively affect owner’s wealth.
Changes in Risk
One of the key elements in the stock valuation process is the required rate of return. Generally speaking, the amount of return required by an investor should be related to the level of risk that must be assumed in order to generate that return.
Recall that using the CAPM, we define a stock’s required return as
Required rate of return =Risk free rate+[Stock Beta ×(Market return-risk free rate)]
In the CAPM, the risk of a stock is captured by its beta. For that reason, the required return on a stock increases (or decreases) with increases (or decreases) in its beta. Thus any action of the financial manager that increase the risk contributes to a reduction in value, and any action that decrease risk contributes to an increase in
Common stock represents ownership of the corporation. So the common stockholders are the owners of the firm. They elect the firm’s board of directors, who in turn appoint the firm’s top management team. The firm’s management team then carries out the day-to-day management of the firm.
Characteristics of common stock Does not have maturity date, but exist as long as the firm’s does. Nor does common stock have an upper and lower limit on its dividend payments. Market efficiency
Buyers and sellers use their assessment of an asset’s risk and return to determine its value. For a buyer asset value represents the maximum price that he or she would pay to acquire that and for seller the asset’s value as a minimum sale …show more content…
The result of future growth rates will shift upwards or downwards as affected present of alternate in assumption. Usually, initial growth will present as g1 and rate after shift as g2. The main purpose for this valuation model is present framework for estimated or evaluated the stock value. But, the result not clearly exact because the future growth and discount rates just roughly amount. So that, in applied this model, the rates must be nearest rounded to tenth of percent.
Free Cash Flow Valuation Model
Free cash flow valuation model as another method to estimate the firm’s value. This model will proceed when the firm does not have any dividend history like they just want to start the business or valued the larger public company as they have an operating unit or division.
This valuation model is same basic with model of dividend valuation as all future cash flow represents the value of common stock. The amount of cash flow is accessible to those who are invest and all needed obligation have met.
This model was estimate by defined present value of its expected cash flow discounted as its WACC (weighted average cost of capital) which fund costs over long term. As the forecast is difficult to find so only 5 years are relevant to use in estimate specific annual …show more content…
Changes In The Expected Return
When the economic conditions become stable, the firm’s value should increase since dividend expectation was raise by current and prospective stockholders. Financial manager should act if they think that particular would increase the level of expected return without changing risk because it can positively affect owner’s wealth.
Changes in Risk
One of the key elements in the stock valuation process is the required rate of return. Generally speaking, the amount of return required by an investor should be related to the level of risk that must be assumed in order to generate that return.
Recall that using the CAPM, we define a stock’s required return as
Required rate of return =Risk free rate+[Stock Beta ×(Market return-risk free rate)]
In the CAPM, the risk of a stock is captured by its beta. For that reason, the required return on a stock increases (or decreases) with increases (or decreases) in its beta. Thus any action of the financial manager that increase the risk contributes to a reduction in value, and any action that decrease risk contributes to an increase in