SERIES 66 ASKS QUESTIONS ABOUT METHODS FOR DETERMINING THE VALUE OF EQUITY SECURITIES

Taking the Series 66 exam soon? Make sure that you are familiar with the four common ways of valuing equity securities. NASAA's Series 66 Test Specifications lists these methods in Section II (B) (1-4), so you can reasonably expect to see questions on these methods on the actual Series 66 exam.

Bob Eder covers Valuing Equity Securities in his Study for the Series 66 Exam. Here is a sample of Bob Eder's treatment:

Discounted Cash Flow (DCF)                                                                                     II (B) (4)

Discounted Cash Flow considers all expected dividends that the company will pay over a certain number of years, and reduces them to present value dollars. The method uses a discount percentage that is equivalent to the cost of capital for the company paying the dividend, or the cost of borrowing monies from a bank. The sum of all discounted dividends equals the price of common stock. Discounting involves dividing a number by 1 plus the discount rate.

EXAMPLE OF DISCOUNTING

Max wins $20,000,000 in the state lottery. The catch is that the state will pay the monies to Max only 10 years from now. Max's cost of capital is eight percent. Calculate the present value of Max's lottery winnings. Divide $20,000,000 by (1.08)^10 (i.e., 1.08 raised to the 10th power, or 2.15892), or $20,000,000 divided by 2.15892. This equals the present value of only $9,263,869.76!

Here is the link to NASAA's Test Specifications for the Series 66 Exam. See the references to Determining the Value of Equity Securities in NASAA's Test Specifications, Section II (B) (1-4).

Study for the Series 66 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 66 manual, Study for the Series 66 Exam, or questions in general about the Series 66 Exam, or about Determining the Value of Equity Securities, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.

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