What Is Stock Valuation?

Stock valuation is based on a specific technical indicator and mathematical model to estimate the relative price of the stock over a period of time, also known as the expected stock price.

Stock valuation

The first is based on

Basic model of stock valuation

The calculation formula is:

Stock value

Valuation

Value statement

R-the required rate of return required by the investor

D t -estimated dividend for period t

nthe number of expected holding periods of the stock

Valuation Model for Zero Growth Stocks

Zero-growth stocks refer to the same amount of dividends per share paid by the issuing company each year, that is to say, the annual growth rate of dividends per share is zero. The amount of dividends per share is in the form of a perpetual annuity. The zero growth stock valuation model is:

Stock value = D / Rs

Example: A company's stock is expected to have an annual dividend of 1.8 yuan per share and a market interest rate of 10%. The intrinsic value of the company's stock is:

Stock value = 1.8 / 10% = 18 yuan

If the purchase price is 16 yuan, it is feasible to invest in the stock without considering the risk

Second, the constant growth model

(1) General form. If we assume that dividends will always grow at a constant growth rate, then a constant growth model is established. [Example] If a company paid a dividend of 1.80 yuan per share last year, it is expected that the dividend of the company's stock will increase at a rate of 5% per year in the future. Therefore, the dividend is expected to be 1.80 × (1 ten 0.05) = 1.89 yuan in the next year. Assuming the necessary return is 11%, the company's stock is equal to 1. 80 × [(1 ten 0.05) / (0.11-0.05)] = 1. 89 / (0.1-0.05) = 31.50 yuan. Today, the stock price per share is 40 yuan, so the stock is overvalued at 8.50 yuan. It is recommended that investors who currently hold the stock sell the stock.

(2) The relationship with the zero growth model. The zero growth model is actually a special case of the constant growth model. In particular, assuming that the growth rate is equal to zero, the dividend will always be paid in a fixed amount. At this time, the constant growth model is the zero growth model. From these two models, although the assumption of constant growth has less application restrictions than the assumption of zero growth, it is still considered unrealistic in many cases. However, the constant growth model is the basis of the multivariate growth model, so this model is extremely important.

3. Multivariate growth model The multivariate growth model is the most commonly used discounted cash flow model to determine the intrinsic value of ordinary stocks. This model assumes that there is no specific pattern to predict the changes in dividends over a period of time. After this period, dividends will change according to a constant growth model. Therefore, the dividend flow can be divided into two parts. The first part includes the present value of all the expected dividends during the period when the dividends are irregularly changed. The second part includes the present value of all the expected dividends during the period of constant dividend growth rate from the time point T. Therefore, the value of the stock at the time point (VT) can be obtained by the equation of the constant growth model

[Example] Assume that the dividend per share paid by Company A in the previous year was 0.75 yuan, and the dividend per share expected to be paid in the next year was 2 yuan, so the dividend per share expected to be paid in the next year was 3 yuan, starting from T When = 2, it is expected that the dividend will increase at a rate of 10% per year in the infinite period in the future, that is, 0 :, Dz (1 / 10.10) = 3 × 1.1 = 3.3 yuan. Assuming that the company's necessary return is 15%, V7 and the recognition t can be calculated according to the following formulas. Compared with the current price of 55 yuan per share, the price seems to be fairly fair, that is, the stock has not been mispriced.

(2) Internal rate of return. Both the zero-growth model and the constant-growth model have a simple formula for the internal rate of return. For a multiple-growth model, it is impossible to get such a simple expression. Although we can not get a simple expression of internal rate of return, we can still use trial and error method to calculate the internal rate of return of the multiple growth model. That is, after the equation is established, after substituting a hypothetical yi, if the value on the right side of the equation is greater than P, it is assumed that the assumed P is too large; on the contrary, if a suboptimal value is substituted, the value on the right side of the equation is less than the selected P Too small. Continue trial selection, and eventually the formula equation can be established. According to this trial and error method, we can conclude that the internal rate of return of Company A's stock is 14.9%. Comparing a given necessary return of 15% with the approximate internal rate of return of 14.9%, we know that the company's stock is fairly priced.

(3) Two-element model and three-element model. Sometimes investors use binary and ternary models. The binary model assumes that there is a common constant growth rate before time, and at time 7 and later, another constant growth rate city is assumed. The ternary model assumes that before the construction time, the constant growth rate is the body I, between 71 and 72 times, the constant growth rate is the period, and after 72 hours, the constant growth rate is the period. Let VTl represent the present value of all dividends after the start of the last growth rate, and acknowledgment represent the present value of all previous dividends. It can be seen that these models are actually special cases of multiple growth models.

Fourth, the price-earnings ratio valuation method P / E ratio, also known as price-earnings ratio, it is the ratio between the price per share and earnings-per-share, the calculation formula is the opposite, the price per share = price-earnings ratio × earnings per share. If we can estimate the stock separately P / E ratio and earnings per share, then we can indirectly estimate the stock price from this formula. This method of evaluating stock prices is the "price-earnings ratio valuation method"

5. Discounted cash flow model The discounted cash flow model uses the capitalized pricing method of income to determine the intrinsic value of ordinary stocks. According to the capitalization pricing method of income, the intrinsic value of any asset is determined by the cash flows that the investor who owns the asset will accept in the future. Since the cash flow is the expected value in the future period, it must be returned to the present value at a certain discount rate, that is, the intrinsic value of an asset is equal to the discounted value of the expected cash flow. For stocks, this expected cash flow is the dividend that is expected to be paid in the future. Therefore, the formula for the discounted cash flow model is: Dt is the expected cash associated with a particular common stock within time T Flow, that is, the dividend per share expressed in cash in the future; K is the appropriate discount rate of cash flow at a certain degree of risk; V is the intrinsic value of the stock. In this equation, it is assumed that the discount rate is the same for all periods. From this equation we can derive the concept of net present value. The net present value is equal to the difference between the intrinsic value and the cost, where: P is the cost of purchasing the stock at t = 0. If NPV> 0, it means that the sum of the net present value of all expected cash inflows is greater than the investment cost, that is, the stock is undervalued, so it is feasible to buy this stock; if NPV <0, it means that all expected cash inflows The sum of the net present value is less than the investment cost, that is, the stock is overvalued, so it cannot be purchased. After understanding the net present value, we can come up with the concept of internal rate of return. The internal rate of return is the discount rate that makes the investment's net present value equal to zero. If K * is used to represent the internal rate of return, the internal rate of return K * can be solved by the equation. Compare K * with the necessary rate of return of a stock with the same level of risk (indicated by K): if K *> K, you can buy this stock; if K * <K, don't buy this stock. A problem with the intrinsic value of a common stock is that investors must predict all dividends to be paid in the future. Since ordinary stocks do not have a fixed life cycle, it is recommended to use an infinite period of dividend flow, which requires some assumptions. These assumptions always revolve around the victory growth rate. Generally, at time T, the dividend per share is regarded as the dividend per share at time T-1 multiplied by the victory growth rate GT. For example, if expected at T Dividend per share is $ 4 when = 3, and $ 4.2 per share when T = 4, then different types of discounted cash flow models reflect different assumptions of dividend growth rates