Question

Describe the key features of stocks: 1) common stock 2) Preferred stock 3) Classified stock 4) Tracking stock. Describe, compare, and contrast the following FCF valuation models: (1) constant-growth (2) Non-constant growth Distinguish between dividend valuation and FCF model. What is the appeal of FCF model?

Answer 1

Common Stock - Common stock is a stock as well as a security which represents ownership in company and excersice voting right are known as common stock.

Key features of Common stock -

1. Stock Represents Ownership

2. Voting Rights

3. Common Stock value

4. Attending Board Meetings.

Preferred Stock - A preference share are those type of shares which have fixed dividend and whose payment takes priority at the time of liquidation than other such as equity etc. are known as preferred stock.

Key features of preferred stock -

1. Fixed Dividend

2. Convertibility

3. Votability

4. Yields

Classified Stock - A classified stock are those stock which are divided into more than one class of the common stock are known as classified stock.

Key features of Classified stock -

1. Higher Dividend

2. Fixed Rate

3. Early payment than others

Tracking Stock - Tracking stock are those stock which are also known as Designer stock which are made for special purpose that is designed to mirror or see the performance of larger index are known as tracking stock.

Key features of tracking stock -

1. Eliminate for creating separate business

2. Better for large scale business.

Constant Growth Model - Constant growth model are also known as Dividend discount model ( DDM) is a method which are used for calculating the intrinstic value or fair value of shares. This value the present value of future dividends.

This Model takes assumption in constant growth in payment of Common equity holders. There are mainly three inputs. They are-

1. Growth rate dividend per share

2. Required rate of return

3. Dividend per share

Formula -

P₀ = D/(k-g)

Non Constant Growth Model - This model is also known as Walters Model. This model shows the clear relationship between the internal rate of return and Cost of capital of the firm in determining the Dividend policy are known as Non Constant model.

In which r and k is constant.

Dividend Valuation - It is the sum of all of its future dividend payments and the discounting back to their present value. It is used to find out the intrinsic value of the shares.

FCF Model - Free cash flow model is equal to cash flow fron operations and from business minus operating as well as non operating expenses are known as free cash flow.

FCF is defines or represents the amount tthat are generating by a business after the accounting for investing the same in non current assets.