Stock Valuation
Chapter Number Chapter 7
Subject COF
Stock Valuation 1
, 📖 Table of Contents
Outline
7.1 Differences Between Debt and Equity
VOICE IN MANAGEMENT
CLAIMS ON INCOME AND ASSETS
MATURITY
TAX TREATMENT
7.2 Common and Preferred Stock
COMMON STOCK
Ownership
Par Value
Preemptive Rights
Authorized, Outstanding, and Issued Shares
Voting Rights
Dividends
International Stock Issues
PREFERRED STOCK
Basic Rights of Preferred Stockholders
Features of Preferred Stock
7.3 Common Stock Valuation
MARKET EFFICIENCY AND STOCK VALUATION
COMMON STOCK DIVIDEND VALUATION MODEL
Zero-Growth Dividend Model
Constant-Growth Dividend Model
Variable-Growth Dividend Model
FREE CASH FLOW STOCK VALUATION MODEL
OTHER APPROACHES TO COMMON STOCK VALUATION
Book Value Per Share
Liquidation Value Per Share
Price/Earnings (P/E) Multiples Approach
7.4 Decision Making and Common Stock Value
CHANGES IN EXPECTED DIVIDENDS
CHANGES IN RISK
7.1 Differences Between Debt and Equity
Stock Valuation 2
, 📍 Debt includes all borrowing incurred by a firm, including bonds, and is
repaid according to a fixed schedule of payments.
📍 Equity consists of funds provided by the firm’s owners (investors or
stockholders), and the stockholders earn a return that is not guaranteed
but is tied to the firm’s performance.
A firm can obtain equity either internally, by retaining earnings rather than paying
them out as dividends to its stockholders, or externally, by selling common or
preferred stock.
VOICE IN MANAGEMENT
→ Stockholders generally have voting rights
→ debtholders do not receive voting privileges
CLAIMS ON INCOME AND ASSETS
📍 Stockholders’ claims on income and assets are secondary to the claims
of creditors.
How Are Assets Divided in Bankruptcy?
1. Secured creditors: Secured bank loans or secured bonds.
Stock Valuation 3
Chapter Number Chapter 7
Subject COF
Stock Valuation 1
, 📖 Table of Contents
Outline
7.1 Differences Between Debt and Equity
VOICE IN MANAGEMENT
CLAIMS ON INCOME AND ASSETS
MATURITY
TAX TREATMENT
7.2 Common and Preferred Stock
COMMON STOCK
Ownership
Par Value
Preemptive Rights
Authorized, Outstanding, and Issued Shares
Voting Rights
Dividends
International Stock Issues
PREFERRED STOCK
Basic Rights of Preferred Stockholders
Features of Preferred Stock
7.3 Common Stock Valuation
MARKET EFFICIENCY AND STOCK VALUATION
COMMON STOCK DIVIDEND VALUATION MODEL
Zero-Growth Dividend Model
Constant-Growth Dividend Model
Variable-Growth Dividend Model
FREE CASH FLOW STOCK VALUATION MODEL
OTHER APPROACHES TO COMMON STOCK VALUATION
Book Value Per Share
Liquidation Value Per Share
Price/Earnings (P/E) Multiples Approach
7.4 Decision Making and Common Stock Value
CHANGES IN EXPECTED DIVIDENDS
CHANGES IN RISK
7.1 Differences Between Debt and Equity
Stock Valuation 2
, 📍 Debt includes all borrowing incurred by a firm, including bonds, and is
repaid according to a fixed schedule of payments.
📍 Equity consists of funds provided by the firm’s owners (investors or
stockholders), and the stockholders earn a return that is not guaranteed
but is tied to the firm’s performance.
A firm can obtain equity either internally, by retaining earnings rather than paying
them out as dividends to its stockholders, or externally, by selling common or
preferred stock.
VOICE IN MANAGEMENT
→ Stockholders generally have voting rights
→ debtholders do not receive voting privileges
CLAIMS ON INCOME AND ASSETS
📍 Stockholders’ claims on income and assets are secondary to the claims
of creditors.
How Are Assets Divided in Bankruptcy?
1. Secured creditors: Secured bank loans or secured bonds.
Stock Valuation 3
