Stock Valuation

Master the art of determining fair value for equity securities

Equity SecuritiesDividend Growth ModelsOwnership Value
I. Fundamental Concepts
Core principles of stock valuation and equity securities

A. Core Principle

The value of a share of common stock is equal to the present value of all future cash flows (dividends) that it is expected to provide. As with bonds, the price of the stock is the present value of these expected cash flows.

Key Insight:

Stock value = Present value of all future dividends

B. Cash Flows for Stockholders

If you buy a share of stock, you can receive cash in two ways:

Dividends

The company pays dividends to shareholders

Capital Gains

You sell your shares to another investor or back to the company

C. Key Terminology

Common Stock

An ownership interest in a corporation

Dividend

A distribution of a portion of a company's earnings to its shareholders

Required Return (Rs)

The rate of return that investors demand for investing in the stock

Dividend Growth Rate (g)

The expected annual rate of growth in dividends

D. Why Stock Valuation Matters

  • • Essential for making investment decisions in equity markets
  • • Helps investors determine if a stock is overvalued or undervalued
  • • Critical for portfolio management and asset allocation
  • • Required for understanding company performance and growth prospects
  • • Foundation for understanding more complex equity derivatives