Stock Valuation (Modul MKL 2010-2011)

STOCK VALUATION

BRIEF CONCEPT

Expected return of stock

Basic stock value:

Common stock value:

a. Zero growth 

Where, Po       = value of common stock

            D₁        = initial dividend

            r_s          = required return of common stock

b. Constant Growth

 Where, P₀        = value of common stock

    D₁          = initial dividend

   r_s             = required return on common stock

   g          = constant rate of growth in dividends

c. Variabel Growth

Where, P₀        = value of common stock

D₀          = the most recent dividend

g₁         = initial dividend growth rate

g₂            = subsequent dividend growth rate

r_s             = required return of common stock

 n          = last year of initial growth period

  d. Free Cash Flow Value Entire Company

Where, Vs       = value of common stock

            Vc       = value of the entire company

            Vd       = market value of the firm’s debt

            Vp       = market value of the preferred stock

            FCF     = free cash flow expected at the end of year t

            r_a             = weighted average cost of capital

Other approach to common stock valuation

•  Book Value

• Liquidation Value   

• Price/earning multiple