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Stock Valuation Formulas

This document summarizes several common models for valving stocks: 1) Dividend discount models value a stock based on the present value of its expected future dividend payments. The constant growth dividend discount model shows that a stock's value equals dividends divided by the difference between the required rate of return and long-term growth rate. 2) Free cash flow models value a stock based on the present value of its expected future free cash flows discounted by the weighted average cost of capital minus long-term growth. 3) Price earnings models value a stock as a multiple of its current or expected future earnings.

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446 views

Stock Valuation Formulas

This document summarizes several common models for valving stocks: 1) Dividend discount models value a stock based on the present value of its expected future dividend payments. The constant growth dividend discount model shows that a stock's value equals dividends divided by the difference between the required rate of return and long-term growth rate. 2) Free cash flow models value a stock based on the present value of its expected future free cash flows discounted by the weighted average cost of capital minus long-term growth. 3) Price earnings models value a stock as a multiple of its current or expected future earnings.

Uploaded by

Elise
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Stock Valuation

Common Stock:

Dividend Discount Models

𝐷 𝐷 𝐷 𝐷
𝑉 = + +⋯+ + ⋯+
(1 + 𝑟) (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)
𝐷 (1 + 𝑔) 𝐷
𝑉 = =
𝑟−𝑔 𝑟−𝑔

Free Cash Flow Model


𝐹𝐶𝐹(1 + 𝑔)
𝑉 =
𝑊𝐴𝐶𝐶 − 𝑔

Price Earnings Model


𝑃
𝑉 = ×𝐸
𝐸

Growth

𝑔 = (𝑅𝑅) × 𝑅𝑂𝐸
𝑔 = (1 − 𝐷𝑃𝑂) × 𝑅𝑂𝐸
𝐷 𝑁𝐼
𝑔 = 1− ×
𝐸 𝐸𝑞𝑢𝑖𝑡𝑦
Required Rate of Return

Dividend Yield Approach

𝑟 = Dividend Yield + 𝑔
𝐷
𝑟 = +𝑔
𝑉
Capital Asset Pricing Model (CAPM)

𝑟 = 𝑟 + 𝛽(market risk premium)

𝑟 = 𝑟 + 𝛽(𝑟 − 𝑟 )

Preferred Stock
𝐷
𝑉 =
𝑟
𝐷
𝑟 =
𝑉
Derivation of Constant Growth DDM

𝐷 𝐷 𝐷 𝐷
𝑉 = + +⋯+ + ⋯+
(1 + 𝑟) (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)
Equation 1

𝐷 (1 + 𝑔) 𝐷 (1 + 𝑔) 𝐷 𝐷
𝑉 = + + ⋯+ +⋯+
(1 + 𝑟) (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)
𝟏+𝒓 𝐷 (1 + 𝑔) 𝐷 (1 + 𝑔) 𝐷 𝐷 𝟏+𝒓
𝑉 × =[ + + ⋯+ +⋯+ ]×
𝟏+𝒈 (1 + 𝑟) (1 + 𝑟) (1 + 𝑟) (1 + 𝑟) 𝟏+𝒈
Equation 2
𝑉 (1 + 𝑟) 𝐷 (1 + 𝑔) 𝐷 𝐷
=𝐷 + +⋯+ +⋯+
1+𝑔 (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)

Equation 2 – Equation 1

After…

𝑉 (1 + 𝑟)
−𝑉 =𝐷
1+𝑔
1+𝑟 1+𝑔
𝑉 ( )−𝑉 ( )=𝐷
1+𝑔 1+𝑔
(1 + 𝑟) − (1 + 𝑔)
𝑉 [ ]=𝐷
1+𝑔
𝑉 (𝑟 − 𝑔) = 𝐷 (1 + 𝑔)
𝐷 (1 + 𝑔)
𝑉 =
𝑟−𝑔
𝑫𝟏
𝑽𝑪𝑺 =
𝒓−𝒈

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