Question

How is a stock valued? What are the key variables considered in the valuation?

How is a stock valued? What are the key variables considered in the valuation?

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Answer #1

There are two ways to value a stock :

  • Dividend discount model - The stock is valued as the present value of its dividend payments. There are two variations : the constant dividend model and the dividend growth model. The variables required are : expected dividend, growth rate and required return of stockholders
  • Cash flow model - The equity value of the firm is calculated as the present values of the FCFE (Free cash flow to equity). Stock value = equity value / number of shares outstanding. The key variables considered are : Net operating profit after tax, non-cash expenses, changes in working capital, capital expenditures, value of debt, value of non-operating assets, growth rate, cost of capital.
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