Just need a conclusion

Introduction

This week’s learning team reflection is based on a “Concept Review Video: Stock Valuation”. This video is about stocks, bonds and stock valuation. Stocks are shares in the ownership of a company. More stocks you have greater your ownership at the company is. Bond is a security. When investor lends money to borrower borrower issues bonds for a certain amount of time. Stock valuation is the method that is used to calculate theoretical value of the company and the company’s stocks.

How Markets and Investors Value a Stock

In the video presentation Katherine Collins recalls how through an inheritance she built her first portfolio. The blue chips stocks she inherited quickly sold between 2000 and 2001 and the ones she kept grew significantly. Katherine indicated that individual investors should never lose sight of the fundamental nature of the stock market which is simply pairing a seller with a buyer. She also describes a stock as a tiny portion of ownership of a company that can be trade at the residual value after all company obligations are paid off, which is the value that is left of the company.

In the video, debt is explained as a contract made with the company with specific terms; and it has a set time period. For example, five or ten year notes, and during that time period the cash flows investors will receive are set at five or ten percent interest payments which at maturity investors will get their capital or principal back. If the company goes back to a quarter that to what is was before, investors still have the right of that contractually arranged return of principal interest and they will get paid before anyone who owns the stock gets paid, for them this means less risk and less upside because they have a contract and they do no not have to pay for ownership.

According to StockIdeas.org (2014), when valuing a stock, markets and investors must look at the metrics value to gauge the true intrinsic value of the business (para. 4). Most of the common ways markets and investors value a stock are by knowing the business cost of assets, cost of earnings, and red flags.

· Cost of assets allows getting a baseline limit for what a stock is worth to figure out what the trade assets of the company are worth.

· Costs of earnings are the premium investors have to pay for the earnings of the company when they invest on a company stock.

· Red flags warn investors to keep their eyes peeled for debt, dilution risk, or for a bad business model, and then adjust their price accordingly.

In addition to the metric values to gauge the true intrinsic value of the business, markets and investors should consider future earnings projections, growth history, and relative valuation.

Dividend Discount Model

As Katherine Collins mentioned in the video stocks can be valued by dividend discount models. An example is the constant growth dividend model that assumes the dividend grows at an average rate forever (Parrino, Kidwell, & Bates, 2012, p. 281). One can determine stock value if one knows current dividend, the required rate of return (R), and the growth rate (g). The model takes the next period dividend (D1) and divides it by the difference from the required rate of return and the growth rate (Parrino, Kidwell, & Bates, 2012, p. 283). For example, say the company’s current dividend is two dollars, with a growth rate of four percent with a required rate of return of nine percent.

First, find the next dividend value which is determined by taking the current dividend and multiple it by the growth rate.

D1= $2 x 1.04= $2.08

Next, determine the current value of the stock by using the equation.

Current Value= D1 / (D-g) Current Value= $2.08/ (.09-.04) = $41.60

As one can see, the stock value from this calculation is $41.60. This is one model used to determine stock value.

Conclusion

References

Parrino, R., Kidwell, D.S., & Bates, T.W. (2012). Fundamentals of Corporate Finance (2nd ed.). Hoboken, NJ: Wiley.

StockIdeas.org. (2014). How Investors Value a Stock. Retrieved from http://www.stockideas.org/how-

investors-value-a-stock/

University of Phoenix. (2014). "Concept Review Video: Stock Valuation" video. Retrieved from University

of Phoenix, FIN571-Corporate Finance website.