Stock Valuation Homework Help
What is Stock Valuation?
Stock valuation is the process investors and students use to determine the fair market price of a common share of stock for company. The three main models used to determine the value of the stock is the no growth stock valuation method, constant growth stock valuation method, and non-constant growth stock valuation model. The no gross valuation model is the simplest model for stock evaluation. In this model, dividend payments are divided by an appropriate discount rate. From this, the value of the stock is found. This formula is also used to find the present value of perpetuities. The second model used is the constant growth stock valuation model. This model discount future dividends payments by dividing the future payments by the expected rate of return minus the growth rate. Finally, the third model used, not constant growth stock valuation, is similar to the formula used to find the present value of bonds. In this formula, future dividend payments are divided by 1+ a discount rate raised to the power of the period of time the payment will be received. Once constant growth is achieved, then the terminal value is found and brought back present-day dollars. Finally, the sum of all the cash flows is equal to the value of the stock.
Why is Stock Valuation Important?
Stock valuation techniques are used in a multitude of situations. First, stock valuation techniques help investors determine whether a stock is over or underpriced. After the calculations are done, if an investor determines a stock is underpriced, then the investor knows they have an opportunity for possible capital gains. If the stock price is overvalued, different strategies may be used to exploit the market or the stock may be avoided by the investor. Corporate executives may use stock evaluation when determining whether to acquire a firm. Through stock valuation, again, corporate executives would be able to determine whether a stock price is overpriced or underpriced. If under price, the strategic actions may be taken to acquire the firm. Finally, stock valuation is important because understanding the concept will help the various interested parties determine which model to use for the evaluation. This understanding will help accurately determine the values of stocks.
Who Needs to Know Stock Valuation Practices?
Stock valuation practices and models should be understood by investors, students, and corporate executives. Investors should understand the valuation practices and models because this practice will allow them to determine which stocks are overpriced and which stocks are underpriced. From this, specific strategic actions may be taken to exploit the marketplace for potential profits. Corporate executives need to understand stock valuation practices to determine which companies may be exploitable through mergers or leveraged buyout. Finally, students should understand the valuation practices because popular finance courses employ the models in various classroom settings. For example, numerous finance books have chapters devoted specifically to stock valuation practices. This leads to instructors testing material regarding the subject. From this, students may improve their class grades by understanding stock valuation practices and the various components related to stock values.
Why You May Need Finance Homework Help:
Stock valuation - Stock valuation homework is important for students to master because corporations are required to maximize the wealth of the owners. The owners are investors who hold stocks. Because of this, understanding stock valuation is critical for managers and students. Before examining various valuation techniques, a brief review of the terminology used for stock valuation is critical, which is done below.
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How Stock Valuation Homework Could Benefit:
- Explain the different components of the stock valuation models. For example, each stock valuation model includes dividends, discount rate, growth, and price. By understanding each component, students will better solve various stock valuation problems.
- Discuss the differences between the models. Stock valuation models very depending upon dividends. When dividends are flat, or there is no growth, then the perpetuity formula is used to determine the price of a stock. When dividends are expected to grow at a constant rate, then the constant rate formula is applicable. Finally, when dividends may change in relations to growth, then the non-constant growth valuation model should be used.
- Help with creating templates for each model. Finance homework help will be able to create different templates to solve for stock valuation, depending on the homework problem.
How Stock Valuation Homework Help Works:
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Stock Valuation Homework Help Examples
Here are some stock valuation homework sample problems:
What Are Stock Valuation Models?
The components needed to calculate the value of a stock are dividend, dividend one, discount rate, and growth rate.
- Dividend – the dividend is the money paid to investors by the company for their investment. Dividends are common for mature companies. However, rapidly growing firms or startup firms usually will pay no dividends. Finance professionals are mostly interested in dividends per share. From this, stock value calculations require dividends to be quantitative in terms of per-share of stock.
- Dividend one – dividend one is the expected dividend to be paid in the next period. The calculation for dividend one is: D0 * (1+Growth). Finance students often use the previous dividend for calculations related to stock valuation. However, this is incorrect process. For the stock valuation, students should use dividend one instead.
- Discount rate – the discount rate is the percent used to discount dividends paid in the future. By doing this, the future dividend payments values are brought back to present-day dollars.
- Growth rate – the growth rate, in relations to stock valuation, is a percentage investors predict the dividend will grow in various time periods. The growth rate is an important component when evaluating the stock price. When calculating stock valuation, an important concept to remember is that the growth rate must exceed the discount rate.
No Growth Stock Valuation
The no growth stock valuation formula is identical to the perpetuity formula. In the formula to the left, the PMT is where you insert the dividend payment. Since there is no growth to the dividend, the dividend inserted is D0. As for the I, this is your discount rate. To calculate the price of a no growth stock, just divide the dividend by the interest rate.
Constant Growth Stock Valuation
The constant growth stock valuation model uses either D0 or D1, discount rate, and growth rate. The first formula in the picture uses D0. In the numerator, D0 is multiplied by 1+ the growth rate. By doing this, you get D1. In the denominator, the discount rate is subtracted from the growth rate. The final step is to divide D1 by the denominator. The result is the value of the stock.
Non-Constant Growth Stock Valuation
The non-constant growth stock valuation model is the most complex of the three options. In this model, each period dividends are brought back to present day dollars. Further, the terminal value needs to be calculated. In the picture to the left, there are three periods identified. The periods range from D1 to D3. For these time frames, the present value formula is applied to each dividend. Next, the terminal value of these because. In calculating the terminal value, an additional dividend timeframe you to be calculated. For example, if exponential growth is expected for the first three periods, then a fourth period needs to be calculated. From this, the constant growth model is applied to this final dividend. Finally, the quotient is applied to the present value formula. From this, the value of the stock may be determined.