Ch8 Notes Feb 5,2018

Topics 1. Stock’s intrinsic value and market equilibrium

2. Stock evaluation and dividend growth

3. DFS Model

4. Preferred stock and common shares

Definition Preemptive right,

And Dual class shares,
Calculation Intrinsic value,
Horizon value
Dividend,
Dividend growth rate,
Preferred stock.

Questions 1. What is the difference between a stock’s price and its intrinsic value? How
And can a market reach the equilibrium?
Examples Read text bookP238-240, P252-254
2. Why should we use dividends’ PV to evaluate stock? What are the two
parts of most stocks’ expected total return?
Read text bookP242-244, review PV and PMT calculation in Ch4
Example: P263, Problem 8-3,7,11
3. How to value a constant growth stock? Are stock prices affected more by
long-term or short-term events? Can constant growth model be used
when g=0 or g is negative?
- Review ”Convergent Sequence” in Calculus
- Read text bookP244-247, PPT 8-22,36
- Example: P263, Problem 8-2,6,8,10
4. How to calculate rate of return on a constant growth stock? What
conditions must hold if a stock is evaluated by using the constant growth
model?
-Read text bookP247-248,255-256, PPT 8-23,28,29
5. Explain what is meant by “horizon date” and “horizon value”. How to
evaluate non-constant growth stock by “horizon value”?
-Read text bookP249-251, review “Uneven Cash Flow” calculation in Ch4
-Example: P263 Problem 8-5,12,14,15
6. How to evaluate stock by FCF approach and market multiple analysis?
-Read text bookP252
7. What’s the difference between preferred stock and bond? How to
evaluate preferred stock?
Compare Preferred stock vs. Bonds, definition, features
Read text bookP240-241 , P252-254
-Example P263, Problem 8-4,16