Milestone 6 – Financial Managment- Stock Valuations

Develop an infographic differentiating common and preferred stocks.

Title: Understanding Common and Preferred Stocks

Objective: Create an infographic that explains the key differences between common and preferred stocks, including their risks, valuation methods, and factors influencing their prices.

Design Guidelines:

1. Use a visually appealing layout with clear sections and icons to represent each topic.
2. Include brief and concise text to convey the main points effectively.
3. Incorporate relevant graphs, charts, or illustrations to enhance understanding.
4. Ensure a balanced and organized design with appropriate color schemes.

Infographic Sections:

1. IntroductionBriefly explain the concept of stocks and their importance in financial markets.State the objective of the infographic.
2. Common Stock a. Definition and Characteristics:Explain what common stock represents and its ownership features.Highlight voting rights and potential for capital appreciation.b. Risk:Illustrate the risk associated with common stocks, such as market volatility and potential losses.Use icons or visuals to represent risk factors.c. Valuation:Explain common stock valuation methods, such as price-to-earnings ratio (P/E) and market sentiment.Include an example or graph demonstrating how common stocks are valued.d. Price Factors:Discuss factors that impact common stock prices, such as company performance, industry trends, and market conditions.Use visuals or graphs to show the relationship between these factors and stock prices.
3. Preferred Stock a. Definition and Characteristics:Define preferred stock and outline its distinctive features, including fixed dividends and higher claim on assets.Mention the absence of voting rights.b. Risk:Explain the lower risk associated with preferred stocks compared to common stocks.Emphasize the higher claim on assets and predictable dividend payments.c. Valuation:Describe preferred stock valuation methods, such as yield-to-call or yield-to-maturity for convertible preferred stock.Use an example or graph to illustrate preferred stock valuation.d. Price Factors:Discuss factors influencing preferred stock prices, such as changes in interest rates and credit ratings.Include visuals or charts to depict the impact of these factors on preferred stock prices.
4. ConclusionSummarize the main points differentiating common and preferred stocks.Emphasize the importance of understanding these differences for investment decision-making.

Questions for Reflection:

1. What are the key differences between common and preferred stocks in terms of ownership and voting rights?
2. Explain the risk associated with common stocks and preferred stocks, highlighting their distinctive characteristics.
3. How are common stocks and preferred stocks valued? Provide examples of valuation methods.
4. What factors impact the prices of common stocks and preferred stocks? Discuss their influence on stock market dynamics.
5. Why is it important for investors to understand the differences between common and preferred stocks when making investment decisions?

Rubric:

4 – Excellent: The infographic demonstrates a thorough understanding of the topic, effectively communicates the content, and exhibits a high level of visual design and organization.

3 – Good: The infographic provides a solid understanding of the topic, effectively communicates the content, and demonstrates a satisfactory level of visual design and organization.

2 – Fair: The infographic shows some understanding of the topic, but there are areas for improvement in communication, visual design, and organization.

1 – Poor: The infographic lacks a clear understanding of the topic, has significant communication and visual design issues, and lacks organization.You have reached a Milestone Activity! Please be sure you complete the lessons above before continuing.

Milestone Activities are important stops along your educational journey to check your progress towards mastering the competency and to get feedback and guidance from your tutorial faculty. Please note: You must complete this Milestone Activity before moving on in this competency.

Milestones ask questions that touch upon concepts covered in previous Learning Activities and provide you with the opportunity to see concepts from the perspective of experts in the field, your faculty. This Milestone Activity is not graded and will not impact your score on your Final Assessment; however, your response must score a “Proficient” or “Exemplary” on each criterion, listed in the Assignment Rubric, in order to access and submit your Final Assessment.

To complete this Milestone Activity, read the question below and then provide your response in the comment box. In order to score a “Proficient” or “Exemplary”, your response must be thoughtful and substantive, and you must reference or cite content from this competency. Your tutorial faculty will use the rubric to determine if your post shows the depth of thought required to successfully complete this Milestone. Let’s get started!Task: View this topic

Description

Price-to-earnings ratio (P/E) provides a great starting point when evaluating stocks. P/E tells you the price that you will pay for each dollar of the company’s earnings. In this video, see how to use the P/E ratio to measure a stock’s value and compare the company to others in its field or industry.

Charles Schwab. (2017, Dec. 15). What is P/E Ratio.

https://www.youtube.com/watch?v=yIX6d79Q4aA

Task: View this topic

DescriptionThis link explains how the “book value” is most frequently used to calculate the price-to-book ratio. The tangible book value is theoretically the amount that common shareholders would receive if all the company’s hard assets were sold for their book values and the company’s debts were paid. The tangible book value is calculated by subtracting preferred equity and intangible assets from the company’s stockholders’ equity. You can find out more about this tool and others by reading chapter 10 in your textbook. Edspira. (2021, Dec. 27). How to determine price to book ratio?

Module 7: Identifying financial sources and uses, the instruments,
and their markets
3
Final Assessment
Milestone 6
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Milestone Assessment
You have reached a Milestone Activity! Please be sure you complete the lessons above
before continuing.
Milestone Activities are important stops along your educational journey to check your
progress towards mastering the competency and to get feedback and guidance from
your tutorial faculty. Please note: You must complete this Milestone Activity before
moving on in this competency.
Milestones ask questions that touch upon concepts covered in previous Learning
Activities and provide you with the opportunity to see concepts from the perspective
of experts in the field, your faculty. This Milestone Activity is not graded and will not
impact your score on your Final Assessment; however, your response must score a
“Proficient” or “Exemplary” on each criterion, listed in the Assignment Rubric, in order
to access and submit your Final Assessment.
To complete this Milestone Activity, read the question below and then provide your
response in the comment box. In order to score a “Proficient” or “Exemplary”, your
response must be thoughtful and substantive, and you must reference or cite content
from this competency. Your tutorial faculty will use the rubric to determine if your post
shows the depth of thought required to successfully complete this Milestone. Let’s get
started!
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Milestone 6
Assignment
Develop an infographic differentiating common and preferred stocks.
Title: Understanding Common and Preferred Stocks
Objective: Create an infographic that explains the key differences between common
and preferred stocks, including their risks, valuation methods, and factors influencing
their prices.
Design Guidelines:
1. Use a visually appealing layout with clear sections and icons to represent each
topic.
2. Include brief and concise text to convey the main points effectively.
3. Incorporate relevant graphs, charts, or illustrations to enhance understanding.
4. Ensure a balanced and organized design with appropriate color schemes.
Infographic Sections:
1. Introduction
Briefly explain the concept of stocks and their importance in financial
markets.
State the objective of the infographic.
2. Common Stock a. Definition and Characteristics:
Explain what common stock represents and its ownership features.
Highlight voting rights and potential for capital appreciation.
b. Risk:
Illustrate the risk associated with common stocks, such as market
volatility and potential losses.
Use icons or visuals to represent risk factors.
c. Valuation:
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Explain common stock valuation methods, such as price-to-earnings ratio
(P/E) and market sentiment.
Include an example or graph demonstrating how common stocks are
valued.
d. Price Factors:
Discuss factors that impact common stock prices, such as company
performance, industry trends, and market conditions.
Use visuals or graphs to show the relationship between these factors and
stock prices.
3. Preferred Stock a. Definition and Characteristics:
Define preferred stock and outline its distinctive features, including fixed
dividends and higher claim on assets.
Mention the absence of voting rights.
b. Risk:
Explain the lower risk associated with preferred stocks compared to
common stocks.
Emphasize the higher claim on assets and predictable dividend payments.
c. Valuation:
Describe preferred stock valuation methods, such as yield-to-call or yieldto-maturity for convertible preferred stock.
Use an example or graph to illustrate preferred stock valuation.
d. Price Factors:
Discuss factors influencing preferred stock prices, such as changes in
interest rates and credit ratings.
Include visuals or charts to depict the impact of these factors on
preferred stock prices.
4. Conclusion
Summarize the main points differentiating common and preferred stocks.
Emphasize the importance of understanding these differences for
investment decision-making.
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Questions for Reflection:
1. What are the key differences between common and preferred stocks in terms of
ownership and voting rights?
2. Explain the risk associated with common stocks and preferred stocks,
highlighting their distinctive characteristics.
3. How are common stocks and preferred stocks valued? Provide examples of
valuation methods.
4. What factors impact the prices of common stocks and preferred stocks? Discuss
their influence on stock market dynamics.
5. Why is it important for investors to understand the differences between
common and preferred stocks when making investment decisions?
Rubric:
4 – Excellent: The infographic demonstrates a thorough understanding of the topic,
effectively communicates the content, and exhibits a high level of visual design and
organization.
3 – Good: The infographic provides a solid understanding of the topic, effectively
communicates the content, and demonstrates a satisfactory level of visual design and
organization.
2 – Fair: The infographic shows some understanding of the topic, but there are areas for
improvement in communication, visual design, and organization.
1 – Poor: The infographic lacks a clear understanding of the topic, has significant
communication and visual design issues, and lacks organization.
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Stocks, also known as equities or shares, represent ownership in a
company and are an essential component of the financial markets. They
play a significant role in the following aspects:
1. Ownership and Voting Rights: Stocks provide investors with ownership
stakes in companies, entitling them to voting rights and a share of the
company’s profits. As shareholders, individuals can participate in
corporate decision-making by voting on key issues during shareholder
meetings.
2. Capital Appreciation: Stocks offer the potential for capital appreciation
as their prices can rise over time. Investors can benefit from price
increases by selling their shares at a higher price than their initial
purchase price, resulting in capital gains.
3. Dividend Income: Some stocks provide dividend payments to
shareholders, which are a portion of the company’s profits distributed
periodically. Dividends can offer a steady income stream for investors,
especially those seeking regular income from their investments.
4. Portfolio Diversification: Stocks enable investors to diversify their
investment portfolios by allocating funds across various companies and
sectors. This diversification helps reduce risk and exposure to any
single investment.
Analyzing and Valuing Stocks:
Stock valuation involves assessing the fair value of a stock based on
various factors, including cash flows from dividend payments, earnings,
and the company’s financial health. Here are examples of stock valuation
methods based on these factors:
1. Dividend Discount Model (DDM):
The DDM values a stock by estimating the present value of future
dividend payments.
It assumes that the intrinsic value of a stock is the sum of the present
value of all expected future dividends.
The DDM requires estimating the expected dividends, determining an
appropriate discount rate, and calculating the present value.
Example: If a stock is expected to pay annual dividends of $2 per share
and the required rate of return is 8%, the intrinsic value of the stock can
be calculated using the DDM.
2. Earnings-Based Valuation:
This approach values stocks based on their earnings, typically using
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the price-to-earnings (P/E) ratio.
The P/E ratio compares a company’s stock price to its earnings per
share (EPS) and indicates how much investors are willing to pay for
each dollar of earnings.
A higher P/E ratio suggests investors have higher growth expectations
for the company.
Example: If a company’s stock is trading at $50 per share, and its EPS is
$5, the P/E ratio would be 10 ($50/$5). Investors may analyze historical
P/E ratios, industry comparables, and growth prospects to assess if the
stock is undervalued or overvalued.
3. Balance Sheet Analysis:
Analyzing a company’s balance sheet can provide insights into its
financial health and value.
Key metrics such as book value per share, debt levels, and cash
holdings are examined to assess the company’s overall stability and
potential for future growth.
Example: If a company has a strong balance sheet with low debt,
significant cash reserves, and valuable assets, it indicates a healthier
financial position and may increase the stock’s value.
Stock valuation is a complex process that incorporates various financial
metrics, market dynamics, industry analysis, and investor sentiment.
Different valuation methods may be appropriate for different types of
stocks, depending on their characteristics and the investor’s objectives.
There are two types of stocks, preferred, and common. The following is
brief explanation of each.
Common Stock: Common stock represents ownership in a company and
gives shareholders voting rights and the potential for capital appreciation.
Here are some key characteristics and considerations:
1. Pricing: The price of common stock is determined by supply and
demand in the stock market. It fluctuates based on various factors
such as company performance, industry conditions, investor sentiment,
and market trends.
2. Dividend Payments: Common stockholders have a residual claim on a
company’s earnings after preferred stockholders and debt holders have
been paid. Dividends are not guaranteed and can vary based on the
company’s profitability and management’s decision to distribute
profits.
3. Risk: Common stockholders bear the highest level of risk among
different types of securities. They are the last to be paid in case of
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Activity Details
Task: View this topic
The attached is a description of stocks and their makeup. It is important to
understand the different types of stock (common & preferred), how pay the investor,
and the risk associated with each. Keep these different characteristics in mind when
reading this material.
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Module 7: Identifying financial sources and uses, the instruments,
and their markets
3
Final Assessment
Stock Valuations
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Principles of Finance
Link
Stock markets are well known for their appeal to accessing capital by publicly traded
firms, and for creating wealth for those who invest wisely. Profitable valuations
requires assessing various components of the market and making the correct
assumptions. The following are a few of the many tools that are used to make such
assumptions. Consider the following an introduction to stock valuations and follow up
by reading chapter 11 in your text to learn more.
Stock valuations can be determined using various methods, including the Price-toEarnings (P/E) ratio, Price-to-Book (P/B) ratio, Dividend Discount Model (DDM), and
Discounted Cash Flow (DCF) analysis. Let’s delve into each method:
1. Price-to-Earnings (P/E) Ratio: The P/E ratio compares the stock price to the
company’s earnings per share (EPS). It is calculated by dividing the current stock
price by the EPS. The P/E ratio reflects the market’s sentiment regarding the
company’s future earnings potential. A higher P/E ratio indicates that investors
are willing to pay more for each dollar of earnings, suggesting a higher valuation.
Conversely, a lower P/E ratio suggests a lower valuation.
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2. Price-to-Book (P/B) Ratio: The P/B ratio compares the stock price to the
company’s book value per share. The book value is the company’s total assets
minus its total liabilities. The P/B ratio provides insights into whether the stock
is trading at a premium or discount relative to its net asset value. A lower P/B
ratio may indicate an undervalued stock, while a higher ratio could suggest an
overvalued stock.
3. Dividend Discount Model (DDM): The DDM estimates the intrinsic value of a
stock by discounting the expected future dividends back to their present value.
It assumes that the value of a stock is equal to the sum of all future cash flows it
generates in the form of dividends. The DDM considers the timing and amount
of expected dividends, as well as the discount rate applied to account for the
time value of money. By discounting future dividends, the DDM provides an
estimate of the stock’s value.
4. Discounted Cash Flow (DCF) Analysis: DCF analysis estimates the intrinsic value
of a stock by forecasting and discounting its expected future cash flows. It
involves projecting the company’s future cash flows, determining a suitable
discount rate (often the company’s cost of capital), and then discounting those
cash flows back to their present value. DCF analysis considers not only
dividends but also other cash flows such as capital expenditures and debt
repayments. It provides a comprehensive valuation approach by considering the
time value of money.
These valuation methods serve as elementary tools to estimate the worth of a stock,
but it’s important to note that no method is foolproof and they rely on assumptions
and inputs that can influence the outcome. It’s advisable to use multiple methods and
consider other factors to gain a more comprehensive view of a stock’s valuation.
Stocks: uses and valuations
Web Page
The attached is a description of stocks and their makeup. It is important to understand
the different types of stock (common & preferred), how pay the investor, and the risk
associated with each. Keep these different characteristics in mind when reading this
material.
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What is P/E Ratio?
Link
Price-to-earnings ratio (P/E) provides a great starting point when evaluating stocks. P/E
tells you the price that you will pay for each dollar of the company’s earnings. In this
video, see how to use the P/E ratio to measure a stock’s value and compare the
company to others in its field or industry.
Charles Schwab. (2017, Dec. 15). What is P/E Ratio. https://www.youtube.com/watch?v=yIX6d79Q4aA
How to determine price to book ratio?
Link
This link explains how the “book value” is most frequently used to calculate the priceto-book ratio. The tangible book value is theoretically the amount that common
shareholders would receive if all the company’s hard assets were sold for their book
values and the company’s debts were paid. The tangible book value is calculated by
subtracting preferred equity and intangible assets from the company’s stockholders’
equity. You can find out more about this tool and others by reading chapter 10 in your
textbook.
Edspira. (2021, Dec. 27). How to determine price to book ratio? https://www.youtube.com/watch?v=MRJXRLQSex8
Dividend Discount Model (DDM)
Link
The following link explains the dividend discount model, or DDM. This is a valuation
model to estimate a stock’s price by discounting its future dividends to a present value.
The model assumes that the company’s future dividend payouts will continue to grow
at a rate equal to historical increases in dividends. This model has its strengths and
weaknesses. Pay attention to what makes this a valuable to and why and where it
should not used.
Finance Strategies. (2021, Jul. 30). Dividend Discount Model (DDM). https://www.youtube.com/watch?v=13lkHIiWsoI
Warren Buffet brilliantly explains discounted cash flow
analysis
Link
In this video, Warren Buffett explains how to use a discounted cash flow analysis to
value a stock. Afterwards the video goes over a step by step example on how to
perform a discounted cash flow analysis.
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Dividendology. (2022, Feb. 11). Warren Buffet brilliantly explains discounted cash flow analysis.

Efficient Markets
Link
This video is produced by Ronald Moy, PhD., and it explains the elements of random
walks and efficient markets. His explanation will supplement your reading of this
section in your text.
Ronald Moy, PhD. (2013, jun 17). Efficient Markets. https://www.youtube.com/watch?v=L6zk0E6YApw
What is a preferred stock
Link
In this lesson, Students learned about the fundamental aspects of preferred stock.
Although Preferred shares are a proportional ownership of equity in a company, the
security performs more like a bond. Unlike common shares, when a company has
increased earnings and growth, the preferred stock won’t change in market price. The
price of redemption for a preferred share is the face value, not a premium or discount
from the book value.
Pysh, Preston. (2012, May 30). What is a preferred stock. https://www.youtube.com/watch?v=MEMMVBJuJ7s&t=300s
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