Stock Valuation

Topics: Stock valuation, Stock, Net present value Pages: 5 (1347 words) Published: August 20, 2010
1. Introduction

2.1 Background of the Studies

Valuation is the first step toward intelligent investing. When an investor attempts to determine the worth of her shares based on the fundamentals, it helps her make informed decisions about what stocks to buy or sell. Without fundamental value, one is set adrift in a sea of random short-term price movements and gut feelings.

Before we can value a share of stock, we have to have some notion of what a share of stock is. A share of stock is not some magical creation that ebbs and flows like the tide; rather, it is the concrete representation of partial ownership of a publicly traded company. If XYZ Corporation has 1 million shares of stock outstanding and we hold a single, solitary share, that means we own a millionth of the company.

There are some stock valuation methods that we can use in valuing company’s stock. For instance: Discounted Cash Flow Model (DCFM), Dividend Discount Model (DDM) and Earnings Growth Model (EGM).DDM is the valuation method that we use in this paper.

2.2 Problem Statement and Objective

This research is mainly to value Public Bank Bhd stock through Dividend Discount Model (DDM).

2.3 Research Question

* What is the value of Public Bank Bhd stock?
* Is Public Bank Bhd stock a worth enough stock for investor to invest in?

2.4 Significance of the Studies

The significance of the studies is to value Public Bank Bhd stock. The result that we generate in the end of the research can help the investors in making their decisions either to invest in Public Bank Bhd or not.

2.5 Limitation of the Studies
The Dividend Discount Model is a simple and convenient way of valuing stocks but it is extremely sensitive to the inputs for the growth rate. Used incorrectly, it can yield misleading or even absurd results, since, as the growth rate converges on the discount rate, the value goes to infinity.

2. Literature Review

Stock valuation is the process of calculating the fair market value of a stock by using a predetermined formulas that factors in various economic indicators. Stock valuation can be calculated using a number of different methods. The most common methods used are the discounted cash flow method, the P/E method, and the Dividend Discount Model .In this study we are using Dividend Discount Model (DDM) to value company stock. The DDM is a procedure on valuing the price of a stock by using predicted dividends and discounting them back to present value. The idea is that if the value obtained from the DDM is higher than what the shares are currently trading at, then the stock is undervalued. Lawrence J. Gitman and Michael D. Joehnk (2008) indicated that stock valuation is to determine what the stock ought to be worth, given estimated returns to stockholders (future dividends and price behaviour) and the amount of potential risk exposure. Whereas Motley Fool Staff (1995) said that stock valuation is the first step toward intelligent stock investing. While Anastasia Vardavaki and John Mylonakis (2007) state that stock valuation is the process of forecasting the present value of the expected payoffs to shareholders and of converting this forecast into one number that corresponds to the fundamental-intrinsic firm value. Lee (1999) argues that valuation models are merely ‘pro forma accounting systems’ that constitute the vehicles for articulating the assessment of future events typically in terms of accounting constructs. According to Barker (2001), a good understanding of valuation methods requires two main things. The first is an analytical review of the models, identifying their relationship and exposing their assumptions. The second is an evaluation of the data that are available for use of these models. Whereas Ping-Chen Lin and Jiah-Shing Chen (2007) indicate that stock valuation is very important for fundamental investors in order to select undervalued...
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