Finance
Chapter 9
Stock Valuation
Learning Objectives 1. List and describe the four types of secondary markets. 2. Explain why many financial analysts treat preferred stock as a special type of bond rather than as a true equity security. 3. Describe how the general dividend-valuation model values a share of stock. 4. Discuss the assumptions that are necessary to make the general dividend-valuation model easier to use, and be able to use the model to compute the value of a firm’s stock. 5. Explain why g must be less than R in the constant-growth dividend model. 6. Explain how valuing a preferred stock with a stated maturity differs from valuing a preferred stock with no maturity date, and be able to calculate the price of a share of preferred stock under both conditions.
I. Chapter Outline
9.1 The Market for Stocks • Equity securities are certificates of ownership of a corporation. • Households dominate the holdings of equity securities, owning more than 36 percent of outstanding corporate equities. A. Secondary Markets • In secondary markets, outstanding shares of stock are bought and sold among investors. • An active secondary market enables firms to sell their new debt or equity issues at a lower funding cost than firms selling similar securities that have no secondary market. B. Secondary Markets and Their Efficiency • In the United States, most secondary market transactions are conducted on one of the many stock exchanges. ▪ In terms of total volume of activity and total capitalization of the firms listed, the NYSE is the largest in the world and NASDAQ is the second largest. ▪ In terms of the number of companies listed and shares traded on a daily basis, NASDAQ is larger than the NYSE. ▪ Firms listed on the NYSE tend to be, on average, larger in size and their shares trade more frequently than firms whose securities trade
Stock Valuation
Learning Objectives 1. List and describe the four types of secondary markets. 2. Explain why many financial analysts treat preferred stock as a special type of bond rather than as a true equity security. 3. Describe how the general dividend-valuation model values a share of stock. 4. Discuss the assumptions that are necessary to make the general dividend-valuation model easier to use, and be able to use the model to compute the value of a firm’s stock. 5. Explain why g must be less than R in the constant-growth dividend model. 6. Explain how valuing a preferred stock with a stated maturity differs from valuing a preferred stock with no maturity date, and be able to calculate the price of a share of preferred stock under both conditions.
I. Chapter Outline
9.1 The Market for Stocks • Equity securities are certificates of ownership of a corporation. • Households dominate the holdings of equity securities, owning more than 36 percent of outstanding corporate equities. A. Secondary Markets • In secondary markets, outstanding shares of stock are bought and sold among investors. • An active secondary market enables firms to sell their new debt or equity issues at a lower funding cost than firms selling similar securities that have no secondary market. B. Secondary Markets and Their Efficiency • In the United States, most secondary market transactions are conducted on one of the many stock exchanges. ▪ In terms of total volume of activity and total capitalization of the firms listed, the NYSE is the largest in the world and NASDAQ is the second largest. ▪ In terms of the number of companies listed and shares traded on a daily basis, NASDAQ is larger than the NYSE. ▪ Firms listed on the NYSE tend to be, on average, larger in size and their shares trade more frequently than firms whose securities trade