The purpose of this review is to discuss the “Concept Review Video: Stock Valuation” from the WileyPLUS learning tool for Week 4 of this learning team assignment. Stock valuations allow the projection or prediction of market values for stocks or investments. The determination of these valuations is through the utilization of various methods. Net Present Value
One approach that investors use to place value on the stock is to look at the Net Present Value from an organization’s streams of expected cash flows. It is from this method that the potential investor can determine how the future cash flows will impact the future value of the stock and how it will be paid to the owners. The dividend discount model is used commonly to estimate the actual value of stock, as well. This transaction is done by discounting back the stream of dividends that may anticipate over a period. This model requires some perception of risk from the business model and financials, but offers the investor the ability to place value on what a stocks future value may be. Future Value
The future value is referred to as the terminal value. The terminal value allows the investor to compare to similar companies and look at factors that would indicate the stock being over valued or under value. Future values do change for there are multiple variables that may impact the performance of the investment. Terminal value can be applied most realistically to annuities, which is an investment that will theoretically return cash payments forever. It also can be used for any asset that has no discernable end date, like a bank account. Common and Preferred Stock
The Essay on Statement of Cash Flow
The importance of cash the cash flow statement help businesses and creditors understand how liquid a company is. Team A discussed some important factors about the statement of cash flow. The purpose of the statement of cash flow and how it is used in accounting is explained. The direct and indirect method of preparing a statement is used. Steps in preparation and classification are explained. The ...
Preferred stock does not have a maturity date although the company can buy back these shares at any time, in other words; the stocks become callable. According to the video, these types of stocks do not inflate as common stock; however, according to “Financial Services of America” (n.d.), “Preferred stock shareholders receive their dividends before common stockholders receive theirs, and these payments tend to be higher. Shareholders of preferred stock receive fixed, regular dividend payments for a specified period of time, unlike the variable dividend payments sometimes offered to common stockholders “(Preferred Stock, 2014).
common stock is slightly more risky however it has the advantages of inflating, unlike preferred stock. Common stock is one form of security issued by a public corporation. The disadvantage to common stock is that preferred stock is paid its dividends first and if the company does not have enough to pay out dividends to common stock it won’t. According to “Financial Services of America” (n.d.), “Owners of common stock have “preemptive rights” to maintain the same proportion of ownership in the company over time. If the company circulates another offering of stock, shareholders can purchase as much stock as it takes to keep their ownership comparable” (Common Stock).
Stock Valuation Variances
The video discusses computing dividends. According to the video, there are two variations of dividends; constant and supernormal. Constant is cumulative signifying an ongoing accrual until terminated. Supernormal has various yields, and the accruals are not consistent. Below is an example of supernormal stock valuations:
The Term Paper on Avon’s Dividend Policy
... beyond the $31.5 stock price. Being a common shareholder, an institutional investor experiences losses in revenues because of the dividend reduction. What is ... OFFEach decision to go for either the new preferred stock or to keep the common stock has pros and cons. The new PERCS ... have as a primary objective, the amount of dividends they will receive divided by the purchase price. This is not ...
Conclusion
Common stocks is “…the basic ownership claim in a corporation…preferred stock represents an ownership interest in the corporation, but as the name implies, preferred stock receives preferential treatment over common stock” (Parrino, Kidwell, & Bates, 2012. p. 276).
Stock valuations enable investors and shareholders to analyze the present and future value of their investments. Other variables may impact the outcome of projections; however, utilization of stock valuations are a proven benefit.
References
Financial Services of America. (n.d.).
Retrieved from http://www.fsa1.com/Common-Stock-vs–Preferred-Stock.c1019.htm Parrino, R., Kidwell, D. S, & Bates, T. W. (2012).
Fundamentals of corporate finance
(2nd ed).
Hoboken, NJ: Wiley
