Equities - Finance Theory, MIT Lecture 7

15.401




15.401 Finance Theory
MIT Sloan MBA Program



Andrew W. Lo
Harris & Harris Group Professor, MIT Sloan School

Lecture 7: Equities


© 2007–2008 by Andrew W. Lo

, Critical Concepts 15.401


ƒ Industry Overview
ƒ The Dividend Discount Model
ƒ DDM with Multiple-Stage Growth
ƒ EPS and P/E
ƒ Growth Opportunities and Growth Stocks

Reading
ƒ Brealey, Myers and Allen, Chapter 4




© 2007–2008 by Andrew W. Lo Slide 2
Lecture 7: Equities

, Industry Overview 15.401


What Is Common Stock?
ƒ Equity, an ownership position, in a corporation
ƒ Payouts to common stock are dividends, in two forms:
– Cash dividends
– Stock dividends
ƒ Unlike bonds, payouts are uncertain in both magnitude and timing
ƒ Equity can be sold (private vs. public equity)

Key Characteristics of Common Stock:
ƒ Residual claimant to corporate assets (after bondholders)
ƒ Limited liability
ƒ Voting rights
ƒ Access to public markets and ease of shortsales


© 2007–2008 by Andrew W. Lo Slide 3
Lecture 7: Equities