Definitions of Terms Used in Stock Valuation Models
by MaestriCommon stocks provide an expected future cash flow stream, and a stock’s value is found in the same manner as the values of other financial assets—namely, as the present value of the expected future cash flow stream. The expected cash flows consist of two elements: (1) the dividends expected in each year and (2) the price investors expect to receive when they sell the stock. The expected final stock price includes the return of the original investment plus an expected capital gain.
We saw in Chapter 1 that managers seek to maximize the values of their firms’ stocks. A manager’s actions affect both the stream of income to investors and the riskiness of that stream. Therefore, managers need to know how alternative actions are likely to affect stock prices. At this point we develop some models to help show how the value of a share of stock is determined.
Taken From : Five-Minute MBA – Corporate Finance
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