Stock Valuation
Constant dividend growth rate model: A common stock valuation model that assumes that dividends will grow at a
constant rate forever.
Cumulative voting: Voting in which each share of stock allows the shareholder a number of votes equal to the
number of directors being elected. The shareholder can then cast all of his or her votes for a single candidate
or split them among the various candidates.
Initial public offering (IPO): The first time a company issues stock to the public. This occurs in the primary markets.
Majority voting: Each share of stock allows the shareholder one vote, and each position on the board of directors is
voted on separately.
Proxy: A means of voting in which a designated party is provided with the temporary power of attorney to vote for
the signee at the corporation’s annual meeting.
Price/earnings ratio: 311 The price the market places on $1 of a firm’s earnings. For example, if a firm has earnings
per share of $2 and a stock price of $30, its price/earnings ratio is 15 ($30 , $2).
Cumulative preferred stock: Preferred stock that requires all past unpaid preferred stock dividends to be paid
before any common stock dividends are declared.
Market’s required yield: The rate of return on the preferred stock’s contractually promised dividend. The market’s
required yield on a preferred stock is analogous to the market’s required yield to maturity on a bond.
Value of Common Stock=
Dividend for Year 1
(Investor ' s Required Rate of Return)−(Divdend Growth Rate )
1
2
Dividend Paid in Year 0(1+ Dividend )
Dividend Paid inYear 0(1+ Dividend )
Growth Rate
Growth Rate
Value of Common=
+
1
1+
Stockholder
's
(1+ Stockholder ' s Required Rate of Return)
Stock in Year 0
Required Rate of Return2
Dividend in Year 0( 1+ Dividend )
Growth Rate
( Dividend inYear 1)
(
Stockholder
'
s
Required
)
V CS =
= Stockholder ' s Required − Dividend
Dividend
Rate of Return
Growth Rate
( Rate of Return)−(
)
Growth Rate
Rate of Growth =(1− Dividend )∗ Rate of Return
in Dividends( g)
Payout Ratio on Equity(ROE)
Value of
Firm
=( Price/ Earnings)∗(
)
Common Stock
Ratio
Earnings per Share
P
Value of
=( Appropriate )∗( Estimated Earnings )= ∗E1
Common Stock , V cs Price/ Earnings
per Share for Year 1 E1
P D 1 / E1
=
E 1 r CS −g
Annual Preferred Stock Dividend
Valueof
= Market ' s Required Yield on Preferred Stock
Preferred Stock
D ps
Annual Preferred Stock Dividend
Value of
= Market ' s Required Yield on Preferred Stock = r ps
Preferred Stock(V ps )