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    Chapter 9 Stocks and Their Valuation

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    Hammad Kamran
    Stocks and their Valuation discusses legal rights and privileges of common stockholders such as proxy voting and preemptive rights. It examines approaches to valuing common stock including the dividend growth model using constant and non-constant growth, the free cash flow model, and the discounted dividend model. It also discusses valuing stocks using multiples approaches such as P/E and enterprise value multiples or the economic value added approach.

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    Chapter 9 Stocks and Their Valuation

    Uploaded by

    Hammad Kamran
    79 views24 pages
    Stocks and their Valuation discusses legal rights and privileges of common stockholders such as proxy voting and preemptive rights. It examines approaches to valuing common stock including the dividend growth model using constant and non-constant growth, the free cash flow model, and the discounted dividend model. It also discusses valuing stocks using multiples approaches such as P/E and enterprise value multiples or the economic value added approach.

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    Chapter 9 Stocks and their Valuation

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    Stocks and their Valuation discusses legal rights and privileges of common stockholders such as proxy voting and preemptive rights. It examines approaches to valuing common stock including the dividend growth model using constant and non-constant growth, the free cash flow model, and the discounted dividend model. It also discusses valuing stocks using multiples approaches such as P/E and enterprise value multiples or the economic value added approach.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    79 views24 pages

    Chapter 9 Stocks and Their Valuation

    Uploaded by

    Hammad Kamran
    Stocks and their Valuation discusses legal rights and privileges of common stockholders such as proxy voting and preemptive rights. It examines approaches to valuing common stock including the dividend growth model using constant and non-constant growth, the free cash flow model, and the discounted dividend model. It also discusses valuing stocks using multiples approaches such as P/E and enterprise value multiples or the economic value added approach.

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    Stocks and their Valuation

    CHAPTER 9
    Legal Rights and Privileges of Common Stockholders
    Proxy: A document giving one person the authority to act for another, typically the power to
    vote shares of common stock.
    Proxy fight: An attempt by a person or group to gain control of a firm by getting its stockholders
    to grant that person or group the authority to vote its shares to replace the current
    management.
    Takeover: An action whereby a person or group succeeds in ousting a firm's management and
    taking control of the company.
    Preemptive right: A provision in the corporate charter that gives common stockholders the right
    to purchase on a pro rata basis new issues of common stock.
    Types of Common Stock
    Classified stock: Common stock that is given a special designation such as class A or class B to
    meet the special needs of the company.
    Founders’ shares: stock owned by the firms' founders that enables them to maintain control
    over the company without having to own majority of the stock.
    Stock Price versus Intrinsic Value
    Approaches to value common stock
    Dividend growth model
    ◦ Constant growth model
    ◦ Non constant growth model

    Free cash flow model


    The Discounted Dividend Model
    Constant Growth (Gordon) Model
    Illustration of a constant growth stock
    Dividends versus Growth
    1. Dividends are paid out of earnings
    2. Therefore, growth in dividends requires growth in earnings.
    3. Earnings growth in the long run occurs primarily because firms retain
    earnings and reinvest them in the business.
    4. Therefore, the higher the percentage of earnings retained, the higher the
    growth rate.
    Zero Growth Stock
    Types of Dividend Growth
    Valuing non constant growth stocks
    Corporate Valuation Model
    A valuation model used as an alternative to the discounted dividend model to determine a firm’s
    value especially one with no history of dividends or the value of a division of a larger firm. The
    corporate model first calculates the firm’s free cash flows, then finds their present values to
    determine the firm’s value.
    Corporate
    Valuation Model
    Other approaches to valuing common stock

    ◦ The P/E Multiple Approach


    ◦ The Enterprise-Based Multiples Approach
    ◦ The EVA approach
    The P/E Multiple Approach
    ◦ A company’s P/E ratio shows how much investors are willing to pay
    for each dollar of reported earnings.

    ◦ One obvious drawback of the P/E approach is that it depends on


    reported accounting earnings. For this reason, some analysts
    choose to rely on other multiples to value stocks. For example,
    some analysts look at a company’s price-to-cash-flow ratio,
    whereas others look at the price-to-sales ratio.
    The Enterprise-Based Multiples Approach
    The EVA approach
    Preferred Stock
    Appendix 9A Stock Market Equilibrium
    Changes in Equilibrium Stock Price

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