Common stock evaluation Essay Example | Topics and Well Written Essays - 500 words

Common stock evaluation - Essay Example Stock valuation also enables potential investors gauge the performance and value of stock in the securities market. Establishing the worth of shares helps one make informed investment decision. The managers use this valuation in the analysis of the worth of their business. This information is also useful to creditors in gauging the credit worthiness of a company before advancing credit (Hoover, 2005). This method values the share price by use of forecasted dividends and discounting them. When the figure obtained from the DDM is higher to value of shares presently trading then the stock is considered undervalued (Hoover, 2005). The anticipated earnings price (E/P) ratio is the measure of the firm’s cost of equity. A stock calculated on the zero-growth model can vary in value when the capitalization rate varies as it viewed risk changes (Hoover, 2005). The constant-growth method is essential in valuing stock of stable companies with dividends rising steadily over time. This model estimates an intrinsic stock value stock using the average dividend growth and forecasting it to dividend rises. The denominator remains the same when the rate of capitalization and dividend growth remains unchanged yearly. The stock’s basic value rises per annum by the proportion of the rise in dividend. Both the share price and the dividend amount will rise by the steady -growth factor, g. The model considers only the quantitative and not the qualitative values. Future changes are ignored in calculations.  This model is unfavorable for firms and market with quick changing dividend