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A Blueprint for Corporate Governance by Fred Kaen

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CHAPTER 4

VALUATION

INTRODUCTION

If you are willing to accept the idea that financial markets are efficient, the next question becomes one of how investors price common stocks. What do they consider important? What do they consider irrelevant? And how do they decide what is the required rate of return for their money?

VALUING COMMON STOCK

The basic stock price valuation model is a discounted cash flow model in which the stock price is modeled as the present (discounted) value of the cash flows the investor expects to receive from owning the share. The model is often called the dividend valuation model because it can be represented mathematically as

where

P0 = the price per share today

Dt = the expected per share cash dividend at the end ...

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