Principles of Managerial Finance

320 PART 2 Important Financial Concepts Hint Preferred stock quotations are listed separately and include only four data items: ...

CHAPTER 7 Stock Valuation 321 The price/earnings (P/E) ratio, labeled “PE,” is next. It is calculated by divid- ing the closing ...

322 PART 2 Important Financial Concepts expected return, kˆ The return that is expected to be earned on a given asset each perio ...

CHAPTER 7 Stock Valuation 323 efficient-market hypothesis Theory describing the behavior of an assumed “perfect” market in which ...

324 PART 2 Important Financial Concepts The need to consider an infinite time horizon is not critical, because a sufficiently l ...

CHAPTER 7 Stock Valuation 325 Another assumption of the constant-growth model as presented is that earnings and dividends grow ...

326 PART 2 Important Financial Concepts 6.96 1.00 PV FV CPT I N 1.40 5 Solution Input Function Gordon model A common name for t ...

CHAPTER 7 Stock Valuation 327 variable-growth model A dividend valuation approach that allows for a change in the dividend growt ...

328 PART 2 Important Financial Concepts TABLE 7.3 Calculation of Present Value of Warren Industries Dividends (2004–2006) Presen ...

CHAPTER 7 Stock Valuation 329 Time line for finding Warren Industries current (end-of-2003) value with variable growth 2003 Pres ...

330 PART 2 Important Financial Concepts In Practice For many people, owning their own business represents the dream of a lifetim ...

CHAPTER 7 Stock Valuation 331 The approach demonstrated here is consistent with that found in Alfred Rappaport, Creating Shareh ...

332 PART 2 Important Financial Concepts TABLE 7.5 Calculation of the Value of the Entire Company for Dewhurst Inc. Present value ...

CHAPTER 7 Stock Valuation 333 In the event of liquidation, creditors’ claims must be satisfied first, then those of the preferr ...

334 PART 2 Important Financial Concepts Generally, when the P/E ratio is used to value privately ownedor closely ownedcorporati ...

CHAPTER 7 Stock Valuation 335 Decision Action by Financial Manager Effect on Stock Value P 0 = ks – g Effect on Expected Return ...

336 PART 2 Important Financial Concepts increase for any increase in D 1 or g. Any action of the financial manager that will inc ...

CHAPTER 7 Stock Valuation 337 SUMMARY FOCUS ON VALUE The price of each share of a firm’s common stock is the value of each owner ...

338 PART 2 Important Financial Concepts lower rates. The value of the firm’s common stock is therefore driven by its expected ca ...

CHAPTER 7 Stock Valuation 339 below, respectively, the required return for the period. The efficient-market hypothesis suggests ...