STOCK ANALYSIS AND INVESTMENT pptx

CHAPTER EIGHT: STOCK ANALYSIS

AND INVESTMENT

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INVESTMENT PROCESS

What is Value?

• In general, the value of an asset is the price

that a willing and able buyer pays to a willing

and able seller

• Note that if either the buyer or seller is not

both willing and able, then an offer does not

establish the value of the asset

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Several Kinds of “Value”

• There are several types of value, of which we are concerned

with four:

– Book Value – The carrying value on the balance sheet of the firm’s

equity (Total Assets less Total Liabilities)

– Tangible Book Value – Book value minus intangible assets (goodwill,

patents, etc)

– Market Value - The price of an asset as determined in a competitive

marketplace

– Intrinsic Value - The present value of the expected future cash flows

discounted at the decision maker’s required rate of return

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Determinants of Intrinsic Value

• There are two primary determinants of the intrinsic value of

an asset to an individual:

– The size and timing of the expected future cash flows.

– The individual’s required rate of return (this is determined by a

number of other factors such as risk/return preferences, returns on

competing investments, expected inflation, etc.).

• Note that the intrinsic value of an asset can be, and often is,

different for each individual (that’s what makes markets

work).

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Common Stock

• A share of common stock represents an ownership position in

the firm. Typically, the owners are entitled to vote on

important matters regarding the firm, to vote on the

membership of the board of directors, and (often) to receive

dividends.

• In the event of liquidation of the firm, the common

shareholders will receive a pro-rata share of the assets

remaining after the creditors (including employees) and

preferred stockholders have been paid off. If the liquidation is

bankruptcy related, the common shareholders typically

receive nothing, though it is possible that they may receive

some small amount.

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Common Stock Valuation

• As with any other security, the first step in valuing common

stocks is to determine the expected future cash flows.

• Finding the present values of these cash flows and adding

them together will give us the value:

• For a stock, there are two cash flows:

– Future dividend payments

– The future selling price

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