Stock Valuation
FIN/571
February 4, 2014
University of Phoenix
Stock Valuation
Abstract
According to a Gallup survey 37% of U.S. investors considered the stock market as a possibility to create wealth in the long-term (Gallup Economy, 2013.). Investors buy or sell outstanding shares dependent on their perception of valuation of the stocks. The two types of stocks are common and preferred stocks. Common stock is the bottom of the line for payouts. Preferred stock gets paid before common stock.. Preferred stock tends to have some benefits over common stock such {?}. Bonds provide more certainty than a bond {?}, but still having the freedoms {what kind of freedom?} of a stock (Stock investing, 2006) {I don’t follow}. The dividend models, the net present value stream, and the stock market indices are methods used for valuation of stocks.
Dividend models
The dividend discount model assumes that the cash an investor can receive from his or her stocks in the future is the dividend the publicly traded company is expected to pay out. Therefore, the value of the stock is the present value of the projected dividends (Brinson, 1970). Projected dividends imply that investors will make interpretations or assumptions. Those assumptions are based on information presented by the company, assumptions about the economy of the business segment, the country’s economy, and the financial markets (Pearce, Roley, & Vance, 1985). The dividend growth model supposes that in addition to the projected dividend, investors can expect cash by selling the stock. The general dividend valuation model helps to make assumptions that are needed to project the expectations of future dividends (Brinson, 1970).
Net present values stream
Today’s cash value is determined by what the future cash generation will be, either more profitable or less profitable. A more profitable outcome brings positive increases of cash flow. Less profitable outcomes or a negative return is considered a...