FIN 260 Valuing Stocks by Josh Peters PDF

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Estimating the True Value of a Stock (Excerpt from Morningstar Dividend Investor Newsletter by Josh Peters, CFA)

To value a stock, you need two pieces of information: a forecast of future financial performance and a discount rate with which to evaluate future cash flows, such as dividends. The discount rate, or “cost of equity” as it is applied to a common stock, reflects what a reasonable investor would consider a fair return given the risks involved. Similar to the relationship between bond prices and interest rates, lower required returns imply higher valuations and vice versa. 1/19/16

Equity Valuation Using the Dividend Discount Model From: Morningstar Dividend Investor August 2012

To value a stock, you need two pieces of information: a forecast of future financial performance and a discount rate with which to evaluate future cash flows (dividends, in our case). The discount rate, or “cost of equity” as it is applied to a common stock, reflects what a reasonable investor would consider a fair return given the risks involved. Similar to the relationship between bond prices and interest rates, lower required returns imply higher valuations and vice versa. We recently reduced our cost of equity assumption for Realty Income to 8.0% from 9.1%; that alone accounts for a rise in our fair value estimate to $41 from $34. If long-term interest rates stay where they are (1.5% on a 10-year Treasury), then an 8% total return from Realty Income might be reason-able, maybe even attractive. Josh Peters, CFA Director of Equity-Income Strategy and Editor...