...Chapters 6 – Valuing Stocks Slide 1 Stock Valuation Book Value • Equity = Assets less Liabilities Liquidation • Sale value of assets less payment of outstanding liabilities • May represent amount greater or less than book value of equity Going Concern (A firm likely to continue in business) • Extraordinary earning power of assets (ROA/ROE) - Book value represents only cost less financing plus past undistributed earnings - Liquidation could ignore the synergy from the collective use of all assets • Intangible Assets - Book value only records the additional price paid over the net tangible value of the asset - Liquidation could approximate market in the case of a patent • Value of Future Investments - Book value records past earnings only - Liquidation reflects future earnings from the assets separated by their sale Slide 2 Stock Valuation 1. The General Case In general, the price today of a share of stock, P0, is the present value of all of its future dividends, D1, D2, D3, . . . Stock Value = D1/(1+r)1 + D2/(1+r)2 + D3/(1+r)3 + … forever where r is the required return. 2. Zero Growth: D1 = D2 = D3 = … Stock Value = D/r [ Perpetuity] 3. Growing Dividend: D2 = D1 x (1+g); D3 = D1 x (1+g)2 Stock Value = D1/(r-g) [Growing...
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