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4. Valuing the Corporation Discounted Dividend vs. Corporate Valuation Valuing the Corporation Stock Valuation > Valuing the Corporation Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_75&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

5. Income approaches include Discount or capitalization rates, Capital Asset Pricing Model (CAPM), Modified Capital Asset Pricing Model, and Weighted average cost of capital ("WACC"). The asset approach to business valuation is based on the principle of substitution: no rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility. The market approach to business valuation is rooted in the economic principle of competition: in a free market the supply and demand forces will drive the price of business assets to a certain equilibrium. Valuing the Corporation Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/stock-valuation-7/valuing-the-corporation-75/valuing-the-corporation-338- 3792?campaign_content=book_192_section_75&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Valuation View on Boundless.com Stock Valuation > Valuing the Corporation

6. P = D1 / ( r - g ). P is the current stock price, g is the constant growth rate in perpetuity expected for the dividends, r is the constant cost of equity for that company, and D1 is the value of the next year's dividends. The equation can also be understood to generate the value of a stock such that the sum of its dividend yield (income) plus its growth (capital gains) equals the investor's required total return. There are also problems with the model, such as the presumption of a steady and perpetual growth rate less than the cost of capital may not be reasonable. Discounted Dividend vs. Corporate Valuation Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/stock-valuation-7/valuing-the-corporation-75/discounted-dividend-vs- corporate-valuation-339- 5150?campaign_content=book_192_section_75&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Stock dividend View on Boundless.com Stock Valuation > Valuing the Corporation

7. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

8. Key terms corporation a group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members discounted cash flow In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values (PVs)– the sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or price of the cash flows in question. Miller-Modigliani hypothesis The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. net asset value Net asset value (NAV) is the value of an entity's assets less the value of its liabilities, often in relation to open- end or mutual funds, since shares of such funds registered with the U.S. Free to share, print, make copies and changes. Get yours at www.boundless.com Stock Valuation

9. Valuation Business Valuation include different methods. Free to share, print, make copies and changes. Get yours at www.boundless.com Google. "Google Image Result for." CC BY http://www.google.com/imgres?q=valuation&hl=en&biw=1275&bih=596&tbs=sur:fmc&tbm=isch&imgrefurl=http://www.restaurantexpert.com/business_valuations.ht ml&tbnid=DY6VL9TEGPxVmM&docid=a9qTF1sUC2ipsM&ved=0CE4QhRYoAA&ei=9oGNUM_-AuTu0gGuwIFg&dur=5610 View on Boundless.comCC BY http://www.google.com/imgres?q=valuation&hl=en&biw=1275&bih=596&tbs=sur:fmc&tbm=isch&imgrefurl=http://www.restaurantexpert.com/business_valuations.ht ml&tbnid=DY6VL9TEGPxVmM&docid=a9qTF1sUC2ipsM&ved=0CE4QhRYoAA&ei=9oGNUM_-AuTu0gGuwIFg&dur=5610View on Boundless.com Stock Valuation

10. CAPM CAPM formula Free to share, print, make copies and changes. Get yours at www.boundless.com Google. "Google Image Result for." CC BY http://www.google.com/imgres?q=capm&num=10&hl=en&biw=1275&bih=596&tbs=sur:fmc&tbm=isch&imgrefurl=http://www.investopedia.com/articles/06/capm.asp &tbnid=15LfZEIuq-PgOM&docid=ro6DJyWo1ffc9M&ved=0CE4QhRYoAA&ei=ooGNUJODMtS20AGG94HQDQ&dur=5291 View on Boundless.comCC BY http://www.google.com/imgres?q=capm&num=10&hl=en&biw=1275&bih=596&tbs=sur:fmc&tbm=isch&imgrefurl=http://www.investopedia.com/articles/06/capm.asp &tbnid=15LfZEIuq-PgOM&docid=ro6DJyWo1ffc9M&ved=0CE4QhRYoAA&ei=ooGNUJODMtS20AGG94HQDQ&dur=5291View on Boundless.com Stock Valuation

11. Stock dividend Discounted dividend method can be used to value a company. Free to share, print, make copies and changes. Get yours at www.boundless.com Google. "Google Image Result for." CC BY http://www.google.com/imgres?q=dividend&hl=en&biw=1275&bih=596&tbs=sur:fmc&tbm=isch&imgrefurl=http://beginnersinvest.about.com/od/dividendsdrips1/ss/di vidends-and-dividend-investing-101_4.htm&tbnid=F0EZJ5_oZMH0TM&docid=lVArksgtaJEffM&ved=0CGgQhRYoAA&ei=yoaNUMH0NuPC0QHVlIG4DQ&dur=5213 View on Boundless.comCC BY http://www.google.com/imgres?q=dividend&hl=en&biw=1275&bih=596&tbs=sur:fmc&tbm=isch&imgrefurl=http://beginnersinvest.about.com/od/dividendsdrips1/ss/di vidends-and-dividend-investing-101_4.htm&tbnid=F0EZJ5_oZMH0TM&docid=lVArksgtaJEffM&ved=0CGgQhRYoAA&ei=yoaNUMH0NuPC0QHVlIG4DQ&dur=5213 View on Boundless.com Stock Valuation

12. Free to share, print, make copies and changes. Get yours at www.boundless.com Stock Valuation Which of the following statements regarding corporate valuation approaches is true? A) The income approaches rely on using discount rates to determine a company's value. B) A downside of the asset-based approach of valuing a company is that it is not objective. C) The weighted average cost of capital is an approach used to find the value of a business. D) One of the variables in the Capital Asset Pricing Model is the cost of equity.

13. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Stock Valuation Which of the following statements regarding corporate valuation approaches is true? A) The income approaches rely on using discount rates to determine a company's value. B) A downside of the asset-based approach of valuing a company is that it is not objective. C) The weighted average cost of capital is an approach used to find the value of a business. D) One of the variables in the Capital Asset Pricing Model is the cost of equity.

14. Free to share, print, make copies and changes. Get yours at www.boundless.com Stock Valuation A company has cost of equity of 8% and a dividend growth rate of 3%. Its dividends for next year is $2.20 per share. What should the stock's price be? A) $4.40 B) $44.00 C) $0.22 D) $27

15. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Stock Valuation A company has cost of equity of 8% and a dividend growth rate of 3%. Its dividends for next year is $2.20 per share. What should the stock's price be? A) $4.40 B) $44.00 C) $0.22 D) $27

16. Attribution Wikipedia. "Corporate valuation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_valuationCC BY-SA 3.0http://en.wikipedia.org/wiki/Corporate_valuation Wikipedia. "net asset value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/net%20asset%20valueCC BY-SA 3.0http://en.wikipedia.org/wiki/net%20asset%20value Wikipedia. "discounted cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/discounted%20cash%20flowCC BY-SA 3.0http://en.wikipedia.org/wiki/discounted%20cash%20flow Wiktionary. "corporation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/corporationCC BY-SA 3.0http://en.wiktionary.org/wiki/corporation Wikipedia. "Dividend discount model." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Dividend_discount_modelCC BY-SA 3.0http://en.wikipedia.org/wiki/Dividend_discount_model Wikipedia. "Miller-Modigliani hypothesis." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Miller-Modigliani%20hypothesisCC BY-SA 3.0http://en.wikipedia.org/wiki/Miller-Modigliani%20hypothesis Free to share, print, make copies and changes. Get yours at www.boundless.com Stock Valuation