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Stock Valuation (Calculating Value (Different types of growth (Zero (The…
Stock Valuation
Calculating Value
Basics
Stocks are equal to
The discounted present value of the sum of next period’s dividend plus next period’s stock price
The discounted present value of all future dividends
The reason behind this is that the stock price is determined by whoever wants to buy it
That person will only by it if the dividends they get + the price they sell it for is worth at least what they bought it for
Therefore we get a recursive solution for the value of stock
Different types of growth
Zero
The dividends being payed stays the same
equations go here
g = growth rate
R = required returns/disounted rate
Constant
The dividends being payed changes at the same rate each year
Differential
Dividends being payed grows but at a changing rate each year
Examples
Be wary of g
Where do the parameters come from?
R
Working backward's from dividends
\(P_0 = \frac{Div}{R - g}\)
Solving for R
\(R = \frac{Div}{P_0} + g\)
R = Dividend Yield + Capital Gains
g
Growth rate depends on how much money does the company retain
g = Retention Ratio * Return on Retained Earnings
It's difficult to derermine return on RE in the future so what you could do is look at the past history and make assumptions
Remember Retention ratio is how much of the money they make do they put back into the company
Likewise payout ratio (1 - Retention ratio) is how much of the money they made do they pay out as dividends
Terms
Calculating Value
Dividend Yields
How much are you getting back from the price of the stock through dividends
Misc
Relationships
Dividends = Retention Ratio * Earnings Per Share