Common Stock Valuation

A share of common stock is more difficult to value in practice than a bond, for at least three reasons. First, with common stock, not even the promised cash flows are known in advance. Second, the life of the investment is essentially forever, since common stock has no maturity. Third, there is no way to easily observe the rate of return that the market

Ross et al.: Fundamentals I III. Valuation of Future I 8. Stock Valuation I I © The McGraw-Hill of Corporate Finance, Sixth Cash Flows Companies, 2002

Edition, Alternate Edition

244 PART THREE Valuation of Future Cash Flows requires. Nonetheless, as we will see, there are cases in which we can come up with the present value of the future cash flows for a share of stock and thus determine its value.

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