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How to Value Common Stock & Return Income

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Please help me with an accounting assignment by answering these questions:

a. Explain the methods of how to find the value of common stock.
b. Describe the return (income) an investor can receive from common stock.

Thank you.

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Solution Summary

This solution explains five methods for how to find the value of common stock and describes the return that an investor can receive from common stock.

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Dear Student,

Explain the methods of how to find the value of common stock.

a. Explain the methods of how to find the value of common stock.
First method:
Present value of common stock= dividend/ required rate of return

For example:
Dividend= $ 10 per share
Required rate of return=20%
Present value of common stock= $10/20%=$50 per share.

Second method:
Present value of common stock= free cash flow per share/required rate of return
Free cash flow per share= free cash flow/number of shares
Free cash flow= cash flow from operating activities-capital expenditure-dividends
For example, if

Cash flow from operating activities= ...

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