Equity Valuation

Hi! How are you today?

The 1st assessment was released, have you read through the assessment's requirement?

• Yes. All clear

• Yes but still confusing

• No ...

Question for Asm 1? Share with me here!

Today, we will discuss about Equity valuation. In the previous topic, we learnt about Bond Valuation.

Now, let's quickly compare Bond vs Equity!

How do stocks and bonds differ in terms of risk and return?

• Stocks and bonds are completely independent of risk and return factors.

• Both stocks and bonds have similar risk and return profiles.

• Bonds typically offer higher returns with lower risk than stocks.

• Stocks generally offer higher potential returns but come with higher risk compared to bonds.

What is the key characteristic that distinguishes a bond from a stock?

• Bonds provide ownership stakes in a company, while stocks represent a debt obligation.

• Stocks offer fixed interest payments, while bonds provide a share in company profits.

• Bonds are generally considered more volatile than stocks.

• Stocks represent ownership in a company, whereas bonds are debt securities with fixed interest payments.

Which of the following best describes the primary nature of a stock?

• A fixed-income security representing a loan to a corporation or government.

• A short-term debt security issued by the government.

• A financial instrument representing ownership in a company.

• A contractual agreement to receive periodic interest payments.

Now, how we can determine the value of share?

=>

Step 1: We need to estimate the future cash flow

Step 2: Discount to the PV of all CFs

What can be considered the CFs to be received from a share?

• Future dividends?

• If the market price increases, we can have something?

• Future dividends and the amount when we sell the share

• The money when we sell the share

If the company is assumed to pay fixed dividend, what formula can be used to determine the price?

• Annuity?

• Perpertuity

• Annuity with the first payment is next year

However, the assumption "fixed dividend" is not realistic. Instead, we can assume that the dividends grow at the same (g) rate each period => A growing perpetuity.

Price (t=0) = D1 / (r-g)

• Got it!

• I have no idea

A share just paid an annual dividend of $5/share. The dividend

payments are expected to grow at 10% per year, indefinitely.

Investors require a return of 14% for holding this type of stock.

What is the value of this share?

• $135.7

• $137.50

• $158.5

• $165.2