Chapter 6: Summary

Congratulations!

You have reached the end of the chapter 6 module, Common Stock Valuation.

In the Chapter 6 module, you have 

  • Been introduced to the definition and beginnings of stock valuation
  • Explored the various valuation models including the price ratio models and the dividend discount models with an emphasis on the constant perpetual growth model and the discounted cash flow model
  • Examined the strengths and weaknesses of the various stock valuation techniques
  • Been introduced to The Value Line stock research resource

You should now be able to

  1. Describe the inherent difficulties of predicting stock valuations
  2. Calculate the expected future value of stocks using the various valuation models outlined above
  3. Combine The Value Line research in the calculations of expected future value of various stocks

You are now officially an Investment Guru!

You have been inducted into the Sacred Temple of the Dividend Discount Models.  It is a great privilege and honor but it also carries tremendous responsibility.  Never again can you look at a potential stock investment the same.   You now will look at any potential stock investment through the eyes of one who understands how to value a future cash flow, whether it be from the dividends that the company pays or the expected future stock price or both.  Congratulations!  Go forth into the world, rejoicing in the power that you have been given.  Help yourself and others!  Identify and choose prudent, long-term stock investments that have done well in the past and should continue to do well into the future.  Oh, and by the way, you are welcome.

In our next chapter, we will take a close look at the financial statements that each publicly traded company must publish every quarter.  We will calculate some financial ratios and do a bit of financial ratio analysis.  (Relax, you accounting majors.  We investors are given the financial statements.  We do not have to create them.)