MODULE VII STOCK VALUATION oorporation and entitles its Common stock represents ownership interest in a dividends, which are at the discretion of the management. Common stock, therefore, expected cash flow stream and its value is simply the present value of the expected future cash flow stream. The expected cash flows consist of two elements: 1) the dividends expected in each year and 02) the price the investors expect to receive when selling the stock. There are many approaches for measuring the value ofcommon stock. At the outset, let's assume that the company is a going concern, which means that it will continue to do Constant Growth Model (Gordon Model) One popular method is the Constant Growth Model or the Gordon Model. It assumes that dividends will grow at a constant rate forever. The value of the common stock can be expressed as follows: Dod g) D1 where Po the intrinsic value of the stock; Do he most recent dividend (already paid); Di the expected dividend to be paid in year l g the expected constant growth rate in dividends forever; and 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: Do( g) Por which shows that the expected rate of return is simply the sum of two components: Supernormal or Nonconstant Growth If a stock's dividend growth rate is not constant forever, you have to use the supernormal is expected in the growth model. To find the value ofa stock when a high growth rate (gs early years and will eventually stabilize to g, the following three steps are used: 1. Find the present value of the dividends during the period of nonconstant growth,N