Financial Management: Core Concepts, Third Edition

7.3 Stock Valuation

The value, or price, of a financial asset is the present value of the expected future cash flow you will receive while you maintain ownership of the asset. For example, with a stock, you may receive cash dividends from the company, and when you decide to relinquish your ownership rights—that is, you decide to sell the stock—you will receive your final cash payment, the sales price, from the new owner. Let’s look at a simple illustration of the price of a single share of common stock when we know the future dividends and final selling price.

MyFinanceLab Video

Example 7.1 Stock price with known dividends and sale price

Problem

 Steve wants to purchase shares of Old Peak Construction Company and hold these common shares for ...