how can investors use common stock valuation method and interpret the subjective aspect of it.

Expert Solution

Ans. When deciding which valuation method to use to value the stock its easy to overwhelmed by the no. of valuation techniques available to the investor.

Valuation Methods typically fall into two main categories:

Absolute Valuation
Relative Valuation

Absolute Valuation

The investor attemps this model to find the intrinsic or true value of an investment based only on fundamentals. Fundamentals means you would only focus on things like dividends, cash flows, and growth rate for a single company. Valuation models fall into this category are Divided Discount Model, Discounted Cash Flow Model, Residual Income Model and Assed based Model.

Relative Valuation

This model attempted by the investor for comparing the company in question to other similar companies. This method involves calculating multiples and ratios like price to earning multiples and comparing them to the multiples of similar company.

This model is a lot easier and quicker than the absolute Valuation model that is why many investors and analysts begin ther analysis with this model.

jeff jeffy answered 7 months ago

How can the analysis of risk be integrated into the valuation of common stock? What should happen to the value of common stock if its beta increases?

(Common stock valuation) The common stock of NCP paid $1.32 in dividends last year. Dividends are...

(Common stock valuation) The common stock of NCP paid $1.32 in dividends last year. Dividends are expected to grow at an annual rate of 8.00 percent for an indefinite number of years. a. If your required rate of return is 10.50 percent, what is the value of the stock for you? b. Should you make the investment?

Stock Valuation Research Paper How is Stock Valued, How stock Valuation Changes with change in economy...

Stock Valuation Research Paper How is Stock Valued, How stock Valuation Changes with change in economy or change with other parameters and more

Constant Growth Stock Valuation Investors require a 14% rate of return on Brooks Sisters' stock (rs...

Constant Growth Stock Valuation Investors require a 14% rate of return on Brooks Sisters' stock (rs = 14%). What would the estimated value of Brooks' stock be if the previous dividend was D0 = $1.75 and if investors expect dividends to grow at a constant annual rate of (1) - 6%, (2) 0%, (3) 5%, or (4) 10%? Do not round intermediate calculations. Round your answers to the nearest cent. $ $ $ $ Using data from Part a, what...

Constant Growth Stock Valuation Investors require a 17% rate of return on Brooks Sisters' stock (rs...

Constant Growth Stock Valuation Investors require a 17% rate of return on Brooks Sisters' stock (rs = 17%). What would the value of Brooks' stock be if the previous dividend was D0 = $1 and if investors expect dividends to grow at a constant compound annual rate of (1) - 5%, (2) 0%, (3) 5%, or (4) 11%? Round your answers to the nearest cent. $ $ $ $ Using data from part a, calculate the Gordon (constant growth) model's...

VALUATION OF A CONSTANT GROWTH STOCK Investors require a 16% rate of return on Levine Company's...

VALUATION OF A CONSTANT GROWTH STOCK Investors require a 16% rate of return on Levine Company's stock (i.e., rs = 16%). What is its value if the previous dividend was D0 = $3.25 and investors expect dividends to grow at a constant annual rate of (1) -5%, (2) 0%, (3) 4%, or (4) 11%? Do not round intermediate calculations. Round your answers to two decimal places. (1) $ (2) $ (3) $ (4) $ Using data from part a, what...

Valuation of a constant growth stock Investors require a 15% rate of return on Levine Company's...

Valuation of a constant growth stock Investors require a 15% rate of return on Levine Company's stock (i.e., rs = 15%). What is its value if the previous dividend was D0 = $3.50 and investors expect dividends to grow at a constant annual rate of (1) -3%, (2) 0%, (3) 7%, or (4) 11%? Round your answers to two decimal places. (1) $ (2) $ (3) $ (4) $ Using data from part a, what would the Gordon (constant growth)...

Valuation of a constant growth stock Investors require a 17% rate of return on Levine Company's...

Valuation of a constant growth stock Investors require a 17% rate of return on Levine Company's stock (i.e., rs = 17%). What is its value if the previous dividend was D0 = $1.50 and investors expect dividends to grow at a constant annual rate of (1) -2%, (2) 0%, (3) 2%, or (4) 13%? Round your answers to two decimal places. (1) $ (2) $ (3) $ (4) $ b. Using data from part a, what would the Gordon (constant...

Valuation of a constant growth stock Investors require a 18% rate of return on Levine Company's...

Valuation of a constant growth stock Investors require a 18% rate of return on Levine Company's stock (i.e., rs = 18%). A. What is its value if the previous dividend was D0 = $1.75 and investors expect dividends to grow at a constant annual rate of (1) -7%, (2) 0%, (3) 7%, or (4) 12%? Round your answers to two decimal places. (1) $ (2) $ (3) $ (4) $ B. Using data from part a, what would the Gordon...

1."Compared to the valuations of debt and preferred stock, the valuation of common stock suffers most...

1."Compared to the valuations of debt and preferred stock, the valuation of common stock suffers most from information asymmetry problem due to mostly the uncertainty in the stock's beta." True or false? Select one: a. False b. True 2. "The IRR method assumes that future cash inflows will be reinvested and earn a rate of return equal to the project's WACC." True or false? Select one: a. True b. False

Question