FIN/571 Corporate Finance
October 25, 2014
The purpose of this review is to discuss the “Concept Review Video: Stock Valuation” from the WileyPLUS learning tool for Week 4 of this learning team assignment. Stock valuations allow the projection or prediction of market values for stocks or investments. The determination of these valuations is through the utilization of various methods. Net Present Value
One approach that investors use to place value on the stock is to look at the Net Present Value from an organization's streams of expected cash flows. It is from this method that the potential investor can determine how the future cash flows will impact the future value of the stock and how it will be paid to the owners. The dividend discount model is used commonly to estimate the actual value of stock, as well. This transaction is done by discounting back the stream of dividends that may anticipate over a period. This model requires some perception of risk from the business model and financials, but offers the investor the ability to place value on what a stocks future value may be. Future Value
The future value is referred to as the terminal value. The terminal value allows the investor to compare to similar companies and look at factors that would indicate the stock being over valued or under value. Future values do change for there are multiple variables that may impact the performance of the investment. Terminal value can be applied most realistically to annuities, which is an investment that will theoretically return cash payments forever. It also can be used for any asset that has no discernable end date, like a bank account. Common and Preferred Stock
Preferred stock does not have a maturity date although the company can buy back these shares at any time, in other words; the stocks become callable. According to the video, these types of stocks do not inflate as common stock; however, according to "Financial...
References: Financial Services of America. (n.d.). Retrieved from http://www.fsa1.com/Common-Stock-vs--Preferred-Stock.c1019.htm
Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed).
Hoboken, NJ: Wiley
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