Divided discount model is the procedure that is used to evaluate the valuation of the stock according to its price. This is done through predicting dividends and discounting them back to the present. The public company of choice in the common stock is the Bank of America Corporation. This is a bank and financial holding company. Therefore, it provides banking and nonbanking financial services and products in the united state and beyond in the selected international markets. The value of the stock is given dividing per share by the results of the subtraction between discounted rate and the dividend growth. That is,
Value of the stock= dividend per share/ discounted rate – dividend growth.
Overvaluation of the stock is where the current price in the market and adjusted outlook ratio. This is where the price of the stock is divided with the expected earning to get the ratio. Its price is, therefore, expected to drop (Feldman, 2005). Overvaluation results from the emotional buying spurt causing inflate to the stock market price. Undervaluation is where the financial security and all other forms of the investment selling to the price that is below the set the actual and true intrinsic value. In the stock, this can be evaluated by studying the underlying financial statement from the company and the analysis of them. The statements are such as cash flow, profit retention and how the capital management among others. They contribute to the determination of the intrinsic value.
The fully valued stock is where the price of the stock reflects the underlying earnings of the business and not prone to further rise in price in the future. This is the stable price of the stock and reflects the stock market. The stocks beta is determined through a number of methods. The simple equation, stocks rate of return and the use of the excel graphs are some of the methods determining the beta. Beta is a good measure of the risks in the stock market (Cumming & Johan, 2014). The reasons behind this are that the price variation in the stock market is much important in measuring the risk. Therefore, for the appeal proxy for the risk, the beta shows the possibility of losing value in the stock.
The haven utility in the industry of the stocks helps the players in the stock market to have knowledge of the risk that can be as a result of the price valuation. The last advantage of using the beta is that, it is given a clear and quantifiable measure that is easier to work with assessing the risk. This makes it convenient in calculating and measuring the cost of equity and its valuation in the common stock market.
Competing model to capital asset model is derived from a discounted cash flow and the dividend return. The model is known as the Gordon Model. The other model is the weighted average cost of capital model that concerned with the capital cost (Wessels, 2006). Comparing to the CAMP, the differences with these two models are on whether the firm's risk will increase or decrease. It also depends with the price of the capital stock in the common market. The cost of the stock and the risk in equity, provide a rationale to the state of the market.
Cumming, D., & Johan, S. A. ( 2014). Venture capital and private equity contracting : an international perspective . Waltham: Elsevier,.
Feldman, S. J. (2005). Principles of Private Firm Valuation. Hoboken: John Wiley & Sons.
Wessels, W. J. (2006). Economics. Hauppauge: Barron's.