Professional Documents
Culture Documents
Stock Valuation
Learning Goals
where
P0 = value of common stock
Dt = per-share dividend expected at the
end of year t
Rs = required return on common stock
P0 = value of common stock
Pearson Education Limited, 2015. 7-36
Common Stock Valuation:
The Zero Growth Model
The zero dividend growth model assumes that the
stock will pay the same dividend each year, year after
year.
n
0 1 2 3 4
LG5 Discuss the free cash flow valuation model and the
book value, liquidation value, and price/earnings
(P/E) multiple approaches.
The free cash flow valuation model finds the value of the
entire company by discounting the firms expected free cash
flow at its weighted average cost of capital. The common
stock value is found by subtracting the market values of the
firms debt and preferred stock from the value of the entire
company.