Question

What is Stock Valuation and how do companies make financial decisions based on it?

Answer 1

Stock valuation refers to determining the intrinsic value of a stock. This is calculated as the present value of future cash flows associated with the stuff. Hence we discount the cash flows at a specific rate of interest to arrive at the value of the stock.

Companies based investment decisions on the stock value. For instance they know that giving out dividend will increase the value of the stock. Similarly if dividend is not paid the value of the stock will go down. Also the cash flows associated with a particular investment impact the stock value. So the management assesses various options of capital investment on the basis of free cash flows derived from those projects and the impact on the share value.