MODULE VII: STOCK VALUATION Common stock represents an ownership interest in a corporation and entitles its to therefore, dividends, which are at the discretion of the management. Common stock. of provides an expected cash flow stream and its value is simply the present value the expected future cash flow stream. The expected cash flows consist of two elements: 1) the dividends expected in each year and (2) the price the investors expect to receive when selling the stock. There are many approaches for measuring the value of common stock. At the outset, let's assume that the company is a going concern, which means that it will continue to do business forever, Constant Growth Model (Gordon Model One popular method is the Constant Growth Model or the Gordon Model, It a that dividends will grow at a constant rate forever. The value of the common stock can be expressed as follows: Do( g) where Po the intrinsic value of the stock Do the most recent dividend (already paid) DI the expected dividend to be paid in year 1; forever and g the expected constant growth rate in dividends R the required rate of return on the stock and R g. The constant growth model can also be rearranged to get the following equation: which shows that the expected rate of return is simply the sum of two components: expected dividend yield and (2 expected growth rate or capital gains yield. Supernormal or Nonconstant Growth If a stock's dividend growth rate is not constant forever, you have to use the supernonmal growth model. To find the value of a stock when a high growth rate (g) is expected in the early years and will eventually stabilize to g, the following three steps are used: N. l. Find the present value of the dividends during the period of nonconstant growth