In chapter 9 we learned how to value a project. The same principles are applicable to financial assets such as stocks and bonds. It is the expected cash flow we receive, discounted at a risk-adjusted rate, that returns the correct value of any assets. There are some differences after tax, however, as depreciation in projects is tax deductible, as shown in chapter 9.
When we invest in stocks, the cash flows that we receive are the dividends, and, if you decide to sell, the cash flow from the sale. A stock represents a right of ownership of the equity in a company. The ownership has limited liability, implying that you cannot lose more than what you paid for the equity. When valuing a company we look at the cash flow to shareholders, ...
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