       VALUING STOCK PRICE LESSON PLAN CALCULATING TEACHING MONEY CONCEPT LEARNING FINANCE ECONOMIC PRINCIPLES BUSINESS MATH ACTIVITY SAMPLE EXAMPLE HELP STUDENTS PRACTICE TEACHER FINANCE SKILLS ONLINE COURSE  Students learn how to value stock. # COMMON STOCK VALUATION

Concept:  Understand how common stocks are valued.

There are basically three ways of valuing common stock: 1) using the present value of future dividends, 2) using the present value of free cash flow, and 3) using the present value of current activities + the present value of growth opportunities.  Here, we look at each of these methods individually.

Objectives:

• Understand and define how common stocks are valued
• Discuss and demonstrate how common stocks are valued by future dividends
• Discuss and demonstrate how common stocks are valued by free cash flow
• Discuss and demonstrate how common stocks are valued by the value of current activities and growth opportunities (PVGO)
• Understand and define expected return
• Understand and define market capitalization rate
• Understand the concept of EPS and P/E Ratio
• Discuss and demonstrate how stock price relates to EPS and P/E Ratio

Suggested Grades:

Ninth Grade - Tenth Grade - Eleventh Grade - Twelfth Grade - College - Adult Education - Business Education               STOCK VALUATION LESSON PLAN

Teaching Materials

• Lesson - Common Stock Valuation  (see below for printable lesson)

• Overhead

• Many pre-calculated examples

Lesson Activity

1. What is common stock?
• Ask class to define
• Discuss answers and correct any inconsistencies
2. Bring in the financial section of the local newspaper
• look at the different stocks currently traded
• ask class how the stock prices are set
• Discuss answers
3. Introduce idea that there are 3 methods for valuing common stock
4. Method 1:  PV of future dividends
• introduce constant dividend formula
• work through examples
• introduce future dividend formula
• work through examples
5. Method 2:  PV of free cash flow
• explain free cash flow
• Introduce formula
• work through examples
6. Method 3:  PV of current activities + PV of growth opportunities
• talk about relationship between current activities and EPS
• look at formula for PV of current activities  and work through examples
• introduce PVGO
• look at formula (add in dividends) and work through examples
7. Talk about Expected Return and Market Capitalization
• look at calculation
8. Talk about P/E ratio
• Ask class to consider high PV versus low PV – which offers a better deal?
• Calculate PE ratios – bring in newspaper stock listing that include PE ratios – pick out those stocks the class would buy based on PE

Assessment/Evaluation
Have students complete worksheet. A passing grade is 70% or greater. Print out the teaching lesson pages and exercise worksheets for use with this lesson:

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