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• Deterministicdynamics
• Stochastic dynamics
Fair Value vs Market Price
Fair Value
• Self assigned Value
• Variety of models are used for estimation
Market Price
• Consensus value assessment by all market participants
Trading Signal
V0 = Value of Stock
Dt = Dividend
k = required return
No Growth Model
D
Vo
k
Where the stock has earnings and dividends that are
expected to remain constant foreever.
g ROE b
E1
Vo PVGO
k
Do (1 g ) E1
PVGO
(k g) k
D D D P
V 1
... 2 N N
value Pn ?
(1 b) E1 (1 b) E 2 (1 b) E N P N
V0 ...
(1 k )1 (1 k ) 2 (1 k ) N
P0 d
E k g
If E = $2.73, we have
What is E?
• E = trailing 12-month EPS?
• E = 12-month-forward EPS?
What is g?
• g = average historical EPS growth?