ABSTRACT
There are two main types of stocks issued by corporations: common stock and preferred stock. Common stock represents ownership in the firm, and therefore some influence over the firm’s strategic choices. Preferred stock is more of a hybrid security, in that it has features similar to both common stock and bonds. These two different types of equity have different risks and therefore offer different returns. A classic model, the dividend discount model, is introduced for valuing both types of stocks and under different growth assumptions. The flexibility of the model makes it remarkably useful for valuation purposes, but it cannot be used under all circumstances. For those circumstances in which it cannot be used, the cash flow from assets model is introduced and explained in depth.
