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FIN500 Mod04 P3 Problem 10-3, Common stock valuation

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Hi this is Dr. Jenny and we're on Unit 2 videos; we're looking at problem 10-3, and essentially what we're calculating here is the common stock valuation. I've got the formula listed right here: half the time is figuring which formula applies. And so this is the valuation of common stock. You see the little CS down there. Dividends at zero and then our G is the growth and the R is the required return. So essentially what I've done is I've pulled out the information out of the problem, and then what we have to do is just apply this formula. So, once we apply the formula we're taking $3.50 times the 1 + the growth (sometimes this is quicker to do - I can do 1.05 there) in fact I'll show you I can do that. And then we have the denominator which is the required return minus the growth. So we come up with the common stock value of $24.50. Now you may wonder why company's even care about the stock price. They don't participate in the secondary market, they essentially only get money when they have an initial public offering. So what's the deal? And so I, what I did is actually took a look in Investopeidia© and they have article in there that, and you can click that link if you'd like to look at it, that typically talks about the reasons that a company would care. One is that they use it for stock incentives for their own employees and a lot of the managers will actually have quite a few shares of stock themselves. And then overall, the second reason is that if it continues to under-perform and the stock price falls, that stockholders will band together and actually set up a proxy fight to change management. So there is definitely a, you know, an eye on the stock market and how they actually compare to their competitors and so on. So hopefully this will kind of help you understand why you would even be doing a calculation like this and we'll be using this same formula in the next problem and actually taking it a step further. So, hopefully this will help you understand this, and I look forward to talking to you again.

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Duration: 2 minutes and 55 seconds
Country: Andorra
Language: English
License: Dotsub - Standard License
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Views: 17
Posted by: christineward on Feb 29, 2016

Problem 10-3, Common stock valuation

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