The Iowa Electronic Markets
Stock Valuation
Curriculum using the IEM
Prepared for the Spring 2001 IEM*IDEA/NSF Conference
By:
Dr. Roger Ignatius
Associate Professor of Finance
Husson College
Dr. Thomas A. Rietz
Associate Professor of Finance
University of Iowa
April 2001
Teaching Objectives
Stock Valuation
Motivation
What is the goal of business, of management and of financial management in particular? Answers will
vary, but typically have a common theme: the creation and management of value. Stock valuation is
the attempt to measure the value of a business and that business’ equity in particular. Understanding
valuation helps investors and managers alike in meeting their goals.
Understand several common stock and business valuation models.
Students will learn about several common methods of valuation. These include the dividend discount
model, market multiples and the discounted cash flow model. Students should understand how to
value companies according to each method and understand the factors driving value for each.
Be able to look up data for these models on the internet.
Students should be able to look up basic information required for each valuation method on the
internet. For the dividend discount model, this information includes current dividend and re-investment
rates, return on equity and CAPM inputs. For the market multiples method, this information included
P/E, P/S and market-to-book ratios for the firm and industry. For the discounted cash flow method, this
includes free cash flows and inputs necessary to compute the weighted average cost of capital.
Apply these models to a corporation to value it and understand the major
factors influencing value.
In an assignment, students will apply these valuation models to several companies: IBM, MSFT and
AAPL. At each state, students are asked to ponder differences in the valuations of the models from
each other and the actual stock price. They will consider the impact of changes in inputs to these
models as well.
Trade in IEM based on earnings and valuation predictions.
Students will use current information to form expectations on the firm’s value. They will combine this
with current prices to trade in the IEM Computer Industry Returns market. As the markets progress,
they will monitor prices and returns to determine whether their own assessments prove correct.
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Lecture Outline
Stock Valuation
1. Introduction
a. Principles of Valuation
2. Discounted Dividend Models
a. Constant Dividend Model
b. Constant Growth Model
3. Discounted Cash Flow Model
4. Market Multiple Models
a. P/E Model
b. P/S Model
c.
P/CF Model
5. Summary
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