LEARNING GOALS

306

STOCK

VALUATION

CHAPTER

Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU

Accounting:You need to understand the difference between
debt and equity in terms of tax treatment; the ownership claims
of capital providers, including venture capitalists and stock-
holders; and why book value per share is not a sophisticated
basis for common stock valuation.

Information systems:You need to understand the procedures
used to issue common stock; the sources and types of informa-
tion that impact stock value; and how such information can be
used in stock valuation models to link proposed actions to
share price.

Management:You need to understand the difference
between debt and equity capital; the rights and claims of
stockholders; the process of raising funds from venture capi-

talists and through initial public offerings; and how the market

will use various stock valuation models to value the firm’s

common stock.

Marketing:You need to understand that the firm’s ideas for

products and services will greatly affect the willingness of ven-

ture capitalists and stockholders to contribute capital to the

firm and also that a perceived increase in risk as a result of

new projects may negatively affect the firm’s stock value.

Operations:You need to understand that the amount of capital

the firm has to invest in plant assets and inventory will depend

on the evaluations of venture capitalists and would-be

investors; the better the prospects look for growth, the more

money the firm will have for operations.

Discuss the free cash flow valuation model and

the use of book value, liquidation value, and

price/earnings (P/E) multiples to estimate com-

mon stock values.

Explain the relationships among financial deci-

sions, return, risk, and the firm’s value.

LG6

LG5

Differentiate between debt and equity capital.

Discuss the rights, characteristics, and features

of both common and preferred stock.

Describe the process of issuing common stock,

including in your discussion venture capital, going

public, the investment banker’s role, and stock

quotations.

Understand the concept of market efficiency and

basic common stock valuation under each of

three cases: zero growth, constant growth, and

variable growth.

LG4

LG3

LG2

LG1

7