Narrative Report on "Stocks and Their Valuation"

Presented to: Sir Jun Apacible

Reported by: Roldan Milla and Edmund Edan

Introduction
The presentation on "Stocks and Their Valuation" provided an in-depth understanding of how
stocks function in the financial market. It covered essential concepts, including stock types, their
valuation methods, and the factors influencing their intrinsic value. This report elaborates on the
topics discussed, offering a structured explanation of each key point.

Chapter 1: Understanding Stocks

Stocks, also known as equities, represent ownership in a corporation. They provide stockholders
with a proportional claim on a company’s assets and earnings. There are two main types of
stocks:

Common Stocks

Common stocks provide ownership rights, voting power, and potential financial gains through
capital appreciation and dividends. However, they also come with higher risks, especially in
cases of company bankruptcy, where common stockholders are the last to receive claims.

Preferred Stocks

Preferred stocks act as a hybrid between common stocks and bonds. While they do not offer
voting rights, they provide fixed dividends and have a priority claim over common stocks in case
of liquidation. Some preferred stocks also have convertibility options, allowing them to be
exchanged for common stocks under specific conditions.

Chapter 2: Key Characteristics of Common Stocks

Ownership Representation

Each share of common stock represents a portion of company ownership. If an investor owns
10% of a company's total shares, they effectively own 10% of the company.

Voting Rights
Common stockholders can vote on corporate policies, board elections, mergers, and acquisitions.
These decisions significantly impact the company’s strategic direction.

Dividend Payments

Although not guaranteed, common stockholders may receive periodic dividends based on
company profits and board approval. Companies with consistent dividend payments often attract
long-term investors.

Limited Liability

Stockholders are not personally liable for company debts. If the company goes bankrupt,
investors only lose their investment and are not responsible for additional financial obligations.

Market Value Fluctuations

The value of common stocks is influenced by supply and demand, company performance,
economic conditions, and investor sentiment. Stock prices can fluctuate daily, affecting
investment returns.

Chapter 3: Valuation of Common Stocks

Stock valuation is a critical aspect of investment decisions. The presentation highlighted
different valuation approaches:

Dividend Growth Model (DGM)

This model determines a stock’s intrinsic value based on the expected future dividends, assuming
a constant growth rate. The formula is:
P0=D1r−gP_0 = \frac{D_1}{r - g}
where:

 P0P_0 = current stock price

 D1D_1 = expected dividend next year
 rr = required rate of return
 gg = constant dividend growth rate

Corporate Value Model

Also known as the Free Cash Flow (FCF) method, this model values an entire firm based on the
present value of its future cash flows. The equation is:
ValueFirm=∑FCFt(1+WACC)tValue_{Firm} = \sum \frac{FCF_t}{(1 + WACC)^t}
where:
  FCFtFCF_t = free cash flow at time tt
 WACCWACC = weighted average cost of capital

Price Multiples of Comparable Firms

This method compares a stock’s value with similar companies using valuation ratios like Price-
to-Earnings (P/E), Price-to-Book (P/B), and Enterprise Value-to-EBITDA (EV/EBITDA).

Chapter 4: Common Stock Valuation with Growth

Variations
Constant Growth Stocks

Stocks that grow at a constant rate indefinitely use the Dividend Growth Model (DGM) to
determine their valuation.

Supernormal Growth Stocks

If a stock experiences high growth for a few years before stabilizing, a multi-stage valuation
approach is needed. Example: If a company grows at 30% for 3 years and then stabilizes at 6%,
investors must discount different growth phases separately.

Non-Constant Growth Stocks

Some stocks may have zero growth for a certain period before resuming positive growth. This
requires adjustments in valuation models to account for varying dividend patterns.

Chapter 5: Understanding Preferred Stocks

Preferred stocks offer a fixed dividend, making them attractive to income-seeking investors.
They have characteristics similar to both common stocks and bonds.

Liquidation Preference

Preferred stockholders have a higher claim on assets than common shareholders but rank below
bondholders.

Fixed Dividends
Preferred dividends are predetermined and usually paid before common stock dividends. Some
preferred stocks have cumulative dividends, meaning missed payments accumulate and must be
paid before any dividends are given to common shareholders.

Voting Rights

Most preferred stocks do not grant voting rights. However, under certain circumstances, such as
company takeovers, preferred shareholders may gain temporary voting power.

Convertibility and Redemption

Some preferred stocks have the option to convert into common shares, offering flexibility to
investors. Others may be redeemable at a specific date or under certain conditions.

Chapter 6: Valuation of Preferred Stocks

Preferred stocks are typically valued using the present value of all future dividends, given by:
P0=DrpP_0 = \frac{D}{r_p}
where:

 P0P_0 = value of preferred stock

 DD = fixed annual dividend
 rpr_p = required rate of return

Example: If a preferred stock pays an annual dividend of $3.75 and investors require a 6%
return, the stock value is:
P0=3.750.06=62.50P_0 = \frac{3.75}{0.06} = 62.50

Conclusion
The presentation on "Stocks and Their Valuation" provided a comprehensive overview of the
stock market, emphasizing the key characteristics of common and preferred stocks, various
valuation techniques, and their applications in investment decision-making. Understanding these
principles helps investors make informed choices, balancing risk and return effectively.

Through this report, we have detailed the core concepts discussed during the presentation. The
knowledge gained from this study serves as a valuable foundation for future financial analysis
and investment strategies.
References
1. Ross, S., Westerfield, R., & Jordan, B. (2019). Fundamentals of Corporate Finance.
McGraw-Hill Education.
2. Brigham, E., & Ehrhardt, M. (2021). Financial Management: Theory & Practice.
Cengage Learning.
3. Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the
Value of Any Asset. Wiley.
4. Presentation Slides: Stocks and Their Valuation by Roldan Milla & Edmund Edan.