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Chapter 7 Equity Market and stock Valuation (Stock valuation (Constant…
Chapter 7 Equity Market and stock Valuation
Stock valuation
Constant dividend/Zero growth
firm pay constant dividend forever.
Constant dividend growth(DGM)
firm increase dividend by constant percentage every period
Supernormal Dividend Growth
not consistent initially, but settle down to constant growth eventually.
Find R using DGM
Valuation using multiples
Price- Earning
Bechmark PE ratio x Earning Per Share
Price-sales
Benchmark price-sales ratio x sales per share
Features of stock
Common stock
voting rights
clasess of stock; founder shares, class A and B shares
share proportionally for dividends, assets liquidation
preemptive rights
Preferred stock
dividend must be paid before paid to common stockholder
no voting rights
dividend can be deferred indefinitely.
