340 PART 2 Important Financial Concepts
TABLE 7.6 Summary of Key Valuation Definitions and
Formulas for Common Stock
Definitions of variables
Dtper-share dividend expectedat the end of year t
FCFtfree cash flow expectedat the end of year t
gconstant rate of growth in dividends
g 1 initial dividend growth rate (in variable-growth model)
g 2 subsequent dividend growth rate (in variable-growth model)
kaweighted average cost of capital
ksrequired return on common stock
Nlast year of initial growth period (in variable-growth model)
P 0 value of common stock
VCvalue of the entire company
VDmarket value of all the firm’s debt
VPmarket value of preferred stock
VSvalue of common stock
Valuation formulas
Basic stock value:
P 0 .. . [Eq. 7.2]
Common stock value:
Zero-growth:
P 0 (also used to value preferred stock) [Eq. 7.3]
Constant-growth:
P 0 [Eq. 7.5]
Variable-growth:
P 0
N
t 1
(^) [Eq. 7.6]
FCF value of entire company:
VC.. . [Eq. 7.7]
FCF common stock value:
VSVCVDVP [Eq. 7.8]
FCF∞
(1ka)∞
FCF^2
(1ka)^2
FCF^1
(1ka)^1
DN^1
ksg 2
^1
(1ks)N
D^0 (1g^1 )t
(1ks)t
D^1
ksg
D^1
ks
D∞
(1ks)∞
D^2
(1ks)^2
D^1
(1ks)^1