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## PowerPoint Slideshow about 'Chapter 14 FUNDAMENTALS OF COMMON STOCK VALUATION' - webster

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Chapter 14FUNDAMENTALS OF COMMON STOCK VALUATION

- What is intrinsic value (IV)?
- What is the dividend discount model (DDM)?
- What is the earnings model (EM)?
- How does an investor conduct fundamental analysis on a company stock?

Contemporary Investments: Chapter 14

FUNDAMENTALS OF COMMON STOCK VALUATION-Cont.

- How can an investor value a stock with nonconstant growth?
- How is the market-to-book ratio (MV/BV) used for investment purposes?
- What are the pros and cons of using the price/earnings multiple, or P/E ratio?

Contemporary Investments: Chapter 14

Intrinsic Value

- Definition of an intrinsic value
- What affects intrinsic value
- How to invest based on intrinsic value
- Undervalued
- Overvalued

Contemporary Investments: Chapter 14

Four intrinsic valuation models

- Dividend Discount Model (DDM)
- Earnings Model (EM)
- P/E Ratio
- MV/BV Ratio

Contemporary Investments: Chapter 14

Dividend Discount Model (DDM)

- Develop the intrinsic value, Vs0
- Two implications
- The general Dividend Discount Model
- An example: Lone Star Steakhouse (STAR)

Contemporary Investments: Chapter 14

Figure 14.1 – General Rule for Fundamental Analysis

Contemporary Investments: Chapter 14

Figure 14.2 – Summary of the STAR Example

Contemporary Investments: Chapter 14

Earnings Model (EM)

- Lone Star Steakhouse: An Earnings Model example
- The no-growth example
- The constant-growth example

Contemporary Investments: Chapter 14

Implications for growth companies

- Discussion of the five implications
- Contrast growth company with a growth stock

Contemporary Investments: Chapter 14

Fundamental Analysis in Practice

- Estimate Growth, g
- historical dividend trend growth rate
- historical EPS trend growth rate
- growth rate g = ROE x b
- Estimate the required rate of return, ERs
- Estimate DIV1

Contemporary Investments: Chapter 14

Figure 14.3 – Value Line Report for Lone Star Steakhouse (STAR)

Contemporary Investments: Chapter 14

Caveats for DDM

- DDM is very sensitive to changes in g
- The market risk premium, (ERM-RF) is difficult to determine
- ROE1 is a book value and is an average of many project returns

Contemporary Investments: Chapter 14

Nonconstant-Growth Model

- Value the nonconstant-growth phase via an example
- Value of the constant-growth phase
- Intrinsic value of a two-phase nonconstant growth stock
- General formula for nonconstant-growth model
- Three-phase nonconstant-growth model
- Estimating the nonconstant and constant growth rates

Contemporary Investments: Chapter 14

Market-to-Book Ratio (MV/BV)

- Define Market-to-Book Ratio (MV/BV)
- Why it may discover undervalued stocks
- Beware of MV/BV

Contemporary Investments: Chapter 14

Price/Earnings (P/E) Ratio

- Define Price/Earnings (P/E) Ratio
- Interpret P/E ratios
- Determining value from P/E
- What about low P/Es?
- Implications for investors

Contemporary Investments: Chapter 14

Two alternative ways to use P/E

- Holt’s alternative use of P/E
- Firms that pay no dividends or when g > ERs
- Implications for investors using fundamental analysis
- A growth company may not necessarily be a good investment
- Use P/E and MV/BV with caution

Contemporary Investments: Chapter 14

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