Common Stock _______________________________________________

Equity Claim _________________________________________________

Residual Claim ______________________________________________

Primary Market ______________________________________________

Secondary Market _____________________________________________

IPO __________________________________________________________

2. Secondary markets

NYSE ____________________________________________________________

AMEX __________________________________________________________

NASDQ __________________________________________________________

3. Bull Market __________________________________________________________

Bear Market ___________________________________________________________

Stock Valuation Models

4. The constant dividend model with an infinite horizon________________________________

5. The constant dividend model with a finite horizon__________________________________

6. The constant growth dividend model with a finite horizon___________________________

7. The constant growth dividend model with an infinite horizon__________________________ Now try your hand with practice

8. Stock Valuation

Example 1: Stock price with known dividends and sale price. Agnes wants to purchase common stock of New Frontier Inc. and hold it for 4 years. The directors of the company just announced that they expect to pay an annual cash dividend of $4.00 per share for the next 5 years. Agnes believes that she will be able to sell the stock for $40 at the end of four years. In order to earn 12% on this investment, how much should Agnes pay for this stock?

9. Example 2. Quarterly dividends forever Dividends Forever Formula Lets say that the Peak Growth Company is paying a quarterly dividend of $0.50 and has decided to pay the same amount forever. If Joe wants to earn an annual rate of return of 12% on this investment, how much should he offer to buy the stock at?

10. Example 3. Constant dividends with finite holding period. Formula: Lets say that the Peak Growth Company is paying an annual dividend of $2.00 and has decided to pay the same amount forever. Joe wants to earn an annual rate of return of 12% on this investment, and plans to hold the stock for 5 years, with the expectation of selling it for $20 at the end of 5 years. How much should he offer to buy the stock at?

11. Example 4: Constant growth rate, infinite horizon (with growth rate given). Formula: Lets say that the Peak Growth Company just paid its shareholders an annual dividend of $2.00 and has announced that the dividends would grow at an annual rate of 8% forever. If investors expect to earn an annual rate of return of 12% on this investment how much would they offer to buy the stock for?

12. Example 5: Constant growth, finite horizon. Formula: The QuickFix Company just paid a dividend of $1.25 and analysts expect the dividend to grow at its compound average growth rate of 10.72% forever. If you plan on holding the stock for just 7 years, and you have an expected rate of return of 14%, how much would you pay for the stock? Assume that the next owner also expects to earn 14% on his or her investment.

13. Preferred Stock is_____________________________________________________ Formula: Example 6: Pricing preferred stock. The Mid-American Utility Companys preferred stock pays an annual dividend of 8% per year on its par value of $60. If you want to earn 10% on your investment how much should you offer for this preferred stock?