Scribd
Upload
28 views1 page

111

Uploaded by

Wassup Wasabi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
28 views1 page

111

Uploaded by

Wassup Wasabi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 1

Discussion Forum 3

2. Why are dividends the basis for the valuation of shares of stock?

The value of any investment depends on its cash flows. Dividends represent the actual cash flows going to the
shareholder, so valuing the present value of these cash flows should give you a value for how much
the shares should be worth. Investors consider dividends a source of value as they are a predictable stream of
income. Dividend payments increase demand for a stock and consequently result in a higher stock price.

3. How is a firm’s changing P/E ratio reflected in the stock price? Give example.

While a company's stock price reflects the value that investors are currently placing on that investment, a stock's P/E
ratio indicates how much investors are willing to pay for every dollar of earnings. The P/E ratio multiplied by a
firm’s earnings result in the stock prices. For example, if a firm is experiencing high growth and all the other factors
are help constant, this will lead to a higher P/E ratio reflecting the growth prospects. Stock prices can change simply
because the market changes the P/E ratio appropriate for that stock.

Reflection

What have you learned about the fundamentals of valuation to a novice in business

Determining the economic value of a particular asset and what determines that value is essential in investment.
Knowing the necessary information to make reasonable estimate of what an asset is worth helps us in making sound
and efficient decisions and avoid paying for an asset more than it’s worth.

            Knowing what an asset is worth and what determines that value is a pre-requisite for intelligent decision
making -- in choosing investments for a portfolio, in deciding on the appropriate price to pay or receive in a takeover
and in making investment, financing and dividend choices when running a business.

The premise of valuation is that we can make reasonable estimates in knowing what an asset, real or financial, is
worth. The fundamental principles applied in determining the values of all types of assets remains the same. When a
business or any individual is considering investing in a particular asset, valuation becomes necessary to ensure that
the right price is paid. For financial assets, investor may earn from either bonds or stocks, or a combination of both.
It is therefore important to know how each these type of investments are valued because of key differences in these
two types of securities.

Methods used for bond valuation are different from the methods used for valuing shares of stock. These methods are
not interchangeable although the principles behind such valuation are both the same.
A valuation can be useful when trying to determine the fair value of a security, which is determined by what a buyer
is willing to pay a seller, assuming both parties enter the transaction willingly. When a security trades on an
exchange, buyers and sellers determine the market value of a stock or bond.

The concept of intrinsic value, however, refers to the perceived value of a security based on future earnings or some
other company attribute unrelated to the market price of a security. That's where valuation comes into play. Analysts
do a valuation to determine whether a company or asset is overvalued or undervalued by the market.

A business valuation is a general process of determining the economic value of a whole business or company unit.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy