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Excel Finance Class 61: Stock Value Based on Present Value of Future Dividend Cash Flows. - YouTube
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welcome to finance and Excel video
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number 61 hey if you want to download
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this workbook for chapter 7 click on the
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link directly below the video and scroll
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all the way down to the finance Excel
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class in this video here we want to talk
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about evaluation method for stocks now
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there are lots of different valuation
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methods for stock in this textbook they
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talk about just one and pretty much the
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other ones we're going to talk well the
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one we're going to talk about is based
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on future cash flows oh yeah that's what
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we've been talking about throughout this
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whole book and the future cash flows for
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stocks are dividends now there are other
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valuation methods and most of them
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require that you are pretty good with
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accounting all right so let's just look
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at a hypothetical situation here let's
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just say there was a stock and we knew
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exactly what the dividend was going to
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be at time one so one year from now two
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year from now three four five six seven
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eight
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and at time eight we also knew exactly
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what we were going to sell it for well
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this wouldn't be so hard because we've
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already seen valuation techniques for
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exactly this so I'm going to type time
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and this is one I'm going to type a to
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enter I'm going to highlight this and
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then drag it down down to eight now I'm
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going to type a late did this will be
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our time right we'll do our present
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value of future cash flows this will be
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the cash flow and we pretty much have
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exactly what we want here equals and I'm
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going to click right there that's the
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cash flow one year out a dividend right
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all the way down to seven it's just
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eight we're going to have this cash flow
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and we're going to sell the stock so
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here I'm going to do alt equals and then
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highlight these two right here alright
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so there's our cash flow now we could
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these are future cash flows so now we
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could take the present value of all
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these
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equals PV and the rate are required
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return is 15% that's our discounting
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rate that can be tricky to calculate
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sometimes for stocks we'll see later in
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the this class of some methods of trying
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to figure out what the required return
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is nper we have that it's a relative
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cell reference PMT note comma to skip
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over that and our future value the type
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is going to be end it by default it
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knows in so we leave it out
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control-enter double click and send it
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down now I can come down here and alt
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equals for Auto sum and then down here I
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can say P oh and I'm going to show you
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this great trick you know see how they
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we have these subscripts and sometimes
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you want superscript you highlight this
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and you got to go to the font group
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which is control shift F and then click
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that right there I do alt B I do this
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all the time
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so I know control shift at control shift
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F all to be enter and so stock at price
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at time 0 because all these future cash
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flows were discounted back I'm going to
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say equals minus this
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all right and let's see I'm highlighting
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all those I'm going to add some
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formatting by the way I highlighted all
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these non contiguous areas using the
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ctrl key right there I'm going to pick
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some color all right so that's the
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hypothetical situation there are some
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problems with using future cash flows
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from the stock and I'm sure you could
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think of what some of them what some of
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the problems are problems with using
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dividends for future cash flows the
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board may or may not declare dividends
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remember we talked about this last video
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or the video before the dividends are
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dependent on the Board of Directors
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declaring them and then paying them out
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it's not like debt where interest
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payment for debt is a contractual
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obligation you have to pay it the board
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may declare they may not now in with
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publicly traded companies companies when
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they say they're going to pay them they
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like to Pam because it's a bad sign when
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they don't pay them and usually they're
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pretty predictable so you definitely can
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for some companies that look predictable
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you can use future dividends all right
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but that's problem number one problem
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number two the board can declare whether
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whatever amount they would like right
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there is no contractual amount it's not
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like debt that says you will pay five
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percent now again companies like to be
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pretty predictable and the comfort will
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the ones that are you can use the
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discounting future dividend cash payment
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method right but these are two problems
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and then finally the fine the third one
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is what future price would you use right
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we we just a guess basically oh it says
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okay eight years from now it's gonna be
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selling for twenty five bucks yeah right
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like we know that for sure ah but this
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concept will be helpful for us let's go
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over to our PDFs which also can be
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downloaded
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and I want to look at this if you do if
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there is a way and again we will see a
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few situations where dividends can be
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used to value the stock but here's the
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hypothetical price at time zero we have
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given a one two three dot all the way
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out to some future point right here's
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the actual price we're going to sell the
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stock for way in the future right if I
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blow this up so this is a price way in
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the future and this is our actually I
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can already see that if that's our
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discount rate it actually should be an
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exponent here but the point here is at
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some point when this gets way in the
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future because oh yeah stocks have an
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unlimited life it's not like a bond
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contract that says 30 years right stocks
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hypothetically can go on forever so the
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in developing a model of math model to
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calculate few present value of future
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cash flows for a stock they assume that
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at some point this is going to be way
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way in the future and when you're
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discounted back it gets you know close
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to zero so what they say is then the
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model gets reduced down to just this the
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prep the price of the stock at times
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zero is just all of the future dividends
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discounted back so that's the concept
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here right and you some people say well
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you know what about the stocks that
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don't play dividends well guess what
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that's just like a financial black hole
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there's no way eventually companies have
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to pay dividends right would you make an
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investment in something that would never
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pay cash now you then use the retort is
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well you know it's just I'm going to
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hold it for awhile and sell it and I'm
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never going to but Ed still at some
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point in the future they have to pay
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dividends or it just is like a financial
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black hole so ultimately the problem is
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can we predict future dividends well
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we're going to see three situations
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where we can and the next three videos
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will cover these a constant dividend
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right it just pays $2
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two dollars two dollars oh yeah we
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already talked about that last video or
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two videos ago preferred stock does have
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a stated amount that it pays another
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situation constant growth right company
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some predictable companies tend to have
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predictable growth rate for their
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dividend so we can use this model and
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finally super normal growth that just
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means you you increase in some abnormal
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pattern but then at some point in the
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future you steady off and then you grow
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at Eichen sconce 10th rate alright so in
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our next three videos we'll see the math
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models for these and again the caveat is
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it's all estimation right because there
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is with stocks we just don't have a
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contract the cash flows are not
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guaranteed but in some for some
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companies these models do work alright
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we'll see you next video
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