CHAPTER 8: STOCK VALUATION

PARALLEL D
GROUP 8
-, Jihan Abigail -, Rose Delma Titania Abuno, Marselino
Rumate, Imanuel Monareh, Chelsea

Stock Valuation serves the purpose of judging the investment merits of a share stock
through a performance estimate of a stock’s intrinsic value. By comparing stock’s market
price to its intrinsic value, investors try to see if the stock is either undervalued or
overvalued.
The value of a share of stock depends on the company's future performance. We can
forecast the company's future performance using historical data through:
- Forecasting sales and profit
Future after − tax earnings in year t = Estimated Sales for year t ×
Expected Net profit margin in year t
- Forecasting dividends and prices
To begin this step, we need three additional pieces of information:
1. An estimate of future dividend payout ratios
Since it’s fairly stable, recent dividend payout ratios can be used to project the
future.
2. Number of common shares outstanding during the forecast period
Current number can be used because number of shares outstanding usually
doesn't have significant changes from year to year
3. Future price-to-earnings ratio
To get the future P/E ratio, we must consider the following variables:
a. Growth rate in earnings (Higher growth rate leads to higher P/E ratio)
b. General state of the market (More optimistic market leads to higher P/E
ratio)
c. Amount of debt in a company’s capital structure (Lower debt level leads
to higher P/E ratio)
d. Current and projected rate of inflation (Declining inflation rates normally
leads to higher P/E ratio)
e. Level of dividends (all else being equal, higher dividend payout ratio leads
to higher P/E ratio)
EPS is necessary to value the estimated dividends per share and the estimated
share price.