COMMON STOCK VALUATION AND MARKETS

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COMMON STOCK VALUATION AND MARKETS

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D1=Div per share. k=Required return. Examples: Constant Growth ... DJIA. S&P 500 Index. NASDAQ Composite Index. Other Issues: Stock Market. Participants ... – PowerPoint PPT presentation

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Title: COMMON STOCK VALUATION AND MARKETS


1

COMMON STOCK VALUATION AND MARKETS
Dividend Discount Model
Primary Market IPO
Features
Secondary Market
Preferred Stock
2
DDM
Two-stage growth
Constant growth
No growth
P D1 / (k g)
Above average growth
P D1 / k
Terminal value
k(D1 / P ) g
PShare price D1Div per share kRequired return
P/E Ratio P/E1(D1/E1)/(k g)
3
Examples Constant Growth
Earnings(1) 5 Retention Ratio60b Dividend
Payout40(1-b) Required Returnk12 Sustainable
Growthg b ROE Return on Equity ROE
SHARE PRICES
Return on Equity Retention Ratio
9 12 15 40

50
55.57

60
66.67


4
Stock Markets
  • Dividends
  • Residual Claim
  • Limited Liability
  • Voting Rights
  • Cumulative Voting of a Board of Directors
  • Proxy Votes

5
Primary Market Transaction
  • Net proceeds
  • Gross proceeds
  • Underwriters spread
  • Syndicate
  • Originating house
  • Preemptive rights
  • Red herring prospectus
  • Shelf registration

6
Secondary Markets
  • Stock Exchanges
  • NYSE, NASDAQ, AMEX
  • Quotations
  • Types of Orders

7
Stock Market Indexes
  • DJIA
  • SP 500 Index
  • NASDAQ Composite Index

8
Other Issues Stock Market
  • Participants
  • EMH Efficient Market Hypothesis
  • Regulations
  • International Diversification
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