公司财务精品教学（徐江旻）Session5 Stocks.pdfVIP

Valuing the Firm (Stock Valuation) Jiangmin Xu The Valuation Principle • In our analysis of bonds, we determined that Price(Security) = PV(Future Cash Flows) where the PV is evaluated using competitive market prices • How can we apply this to equities? Some key issues to resolve: – What are the cash flows from holding equity? – How does risk affect our analysis? – How does the investor’s horizon affect our analysis? © Jiangmin Xu A One-Year Investor • Consider an investor who 0 1 – buys the stock today at its current price – holds it for one year, receiving any -P Div + P dividends paid 0 1 1 – sells the stock at the end of one year • Note our convention/simplification: Dividends are paid at year end, and Pt is the “ex-dividend” stock price • Valuation principle implies: Div + P P 1 1 0 1+ r – What is different here from our analysis of bonds? © Jiangmin Xu Risky Cash Flows • Cash Flows are uncertain – Future stock prices are obviously uncertain – Dividends are announced shortly in advance, before that there is no commitment – Rather than having precise estimates of these cash flows, as an investor you have “expectations” ⇒ Cash Flows are Expected Values GM’s Dividend History $3.27 $13.72 0.75 ) $ (