Title: COMMON STOCK VALUATION AND MARKETS
1 COMMON STOCK VALUATION AND MARKETS
Dividend Discount Model
Primary Market IPO
Features
Secondary Market
Preferred Stock
2DDM
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)
3Examples 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
4Stock Markets
- Dividends
- Residual Claim
- Limited Liability
- Voting Rights
- Cumulative Voting of a Board of Directors
- Proxy Votes
5Primary Market Transaction
- Net proceeds
- Gross proceeds
- Underwriters spread
- Syndicate
- Originating house
- Preemptive rights
- Red herring prospectus
- Shelf registration
6Secondary Markets
- Stock Exchanges
- NYSE, NASDAQ, AMEX
- Quotations
- Types of Orders
7Stock Market Indexes
- DJIA
- SP 500 Index
- NASDAQ Composite Index
8Other Issues Stock Market
- Participants
- EMH Efficient Market Hypothesis
- Regulations
- International Diversification