Fin 571team Reflection Week 4

Stock Valuation

FIN/571

Stock Valuation

Individuals should understand the stock valuation before making decision to invest in a certain organization. After watching the “Concept Review Video: Stock Valuation” (WileyPlus Assignment), team B has some discussions as follows:

A stock is a tiny part of ownership of a company. Its value is tied to the value of the company after obligations are paid. A bond differs in that it is a contract. Even if company goes down, individuals will be able to claim the amount they are owed with their bonds. A stockholder will not get paid until the bonds do. The value of a stock by a stockholder depends on the status of the company, becoming better, or worst, depending on the company’s business. A bond has less reward, but individuals will be paid what they signed up for.

A stock has more assumptions about the value of a company present and potential future. There are two levels of stock, common and preferred stock. Preferred stock has priority of being paid over common stock. This gives preferred stock a bond like advantage over common stock. In the case of liquidation, preferred stock will be paid over common. It may have other advantages, such as a preferred dividend at a set time interval, like the interest on a bond.

A way to value stock is to look at the stream of expected cash flow to the owner of a stock, both at present and future. Also taken into consideration is the terminal value, how much a stock can be expected to be sold for. Also taken into consideration are the risks to the stream of cash flow and a person’s interpretation of those risks. This is the dividend discount model.

Other way to value is to consider a company in comparison to other similar companies in the market.

There are also indices put together by companies that use certain criteria to value a company. However, they are not perfect and have biases. It works as a low cost way to look at the market and as a benchmark of stock performance....