RSM332H1 Lecture 5: Class 5
Document Summary
Stock valuation assumption that there is a correct valuation of a stock. Pe ratios: p0/e0 (e0 is most recent 1 year earnings from firm. P0/e1(future pe ratio, e1 we have to estimate (predicted earnings)) - leading/forward pe. Key competitors use your p/e ratio to compare companies. Two sources of payout: dividends, capital gains or losses: pt pt-1. P0 = (d1 + p1)/ 1+r -------- r is the expected return on this stock (in general, this r is not interest rates) r = riskless interest rate + risk premium. P(cid:1006) = afte(cid:396) you pay d(cid:1006), (cid:449)hat"s the (cid:396)e(cid:373)ai(cid:374)i(cid:374)g (cid:448)alue for the stock at t = 2. = (cid:396)e(cid:373)ai(cid:374)i(cid:374)g (cid:448)alue afte(cid:396) payi(cid:374)g all di(cid:448)ide(cid:374)ds is e(cid:395)ual to pt. P0 is equal to the present value of all future dividends. A firm pays constant dividends from any earnings which is constant over time. P/e ratio equals the inverse of the risk adjusted discount rate. First reason to explain p/e ratio risk.
