 In this session, we are going to discuss an example that will help us in understanding the concept of computing the price of a common stock. So, if you are intending to invest in a certain common stock, how you are going to assess the price of a common stock? For that purpose, I am taking an example, a hypothetical example of, say, Lucky Cement. Lucky Cement shares are being sold in the market, and I did a survey, talked to people, discussed it with a financial analyst, talked to a broker, that which share should I invest in, for example, for a year, I have some savings, and I want to invest for a year. So, from the market survey, I found out that everybody has suggested me that you should go for investing in Lucky Cement shares. Now, in the market, I found out that the price of a common stock is Rs. 50. So, now, I also need some other information, so that I can calculate what should be its price. So, in order to assess the price, what we usually do is, basically, what we have to do is, we take out the present value of all the cash flows that I am going to get by buying this stock. So, mainly there are going to be two things. I am intending to sell it back to, sell it back in the market after one year. So, what I will do is, I will have to consider, is there going to be any dividend on this? I will consider that. After a year, how much money will be sold? I want to calculate that value. And what is the market telling me? That the expected rate of return or how many percent profit is going to be invested in this particular stock? So, I need these three information from the market, so that the price should be there at this time, so that I can calculate it and compute it. So, now we have collected the data, for example, we said that the market value at this time is 50 rupees per share. We are expecting the dividend to be 0.16 rupees on one stock. And in the future, after a year, its selling price will be 60 rupees from 50 rupees. By increasing, there is going to be an increase of rupees 10. I took these three information. After that, I wanted one more thing, what was that? That is the expected rate of return. I mean, how much profit or profit I am expecting from this particular investment? And suppose that turned out to be 12 percent. Right? So, how does this come to be known? In the market overall, in this particular sector, in a year, you will get such a rate of return or such a profit. You have to assess the basis of the market data. So, from there, I came to know that it is going to be 12 percent. With all this information, I have plugged in my one year valuation model formula. What I have to do for that? Firstly, I will have to take into account the dividend value. I have taken the dividend as 0.16. I have divided it with the discount factor. Then I have taken the selling price. This is P1. I have divided it with the discount factor. And I have added the value of both of them. I got rupees 53.71. Is the present value of all the possible cash flows which I am expecting in the coming one year. I have taken out the present value of all the cash flows in one year. And this tells me about the price of this particular stock. By Lucky Cement, for example. The market value is 50 rupees. And I have taken out the present value of 53.71. The present value which I will get in the future, according to me, the present value is 53.71. I am saying about 54 rupees. And at this time, I am getting 50 rupees. I should take it immediately. Because I am getting a profit of 3 rupees 71.71. But this is not that fancy. So we feel that the present value is higher than its current price. So it means I am going to benefit. I am going to benefit a lot from investing in this particular stock. But this also tells me that the price prevailed in the market is 50 rupees. The present value of this is 53.71. This means that I was too optimistic about the expected rate of return. Or I am thinking that the selling price is very high. The analysts in the market who are experts in the market They have attached the risk with this particular stock as compared to what I have attached. What I am thinking. So they feel that this is too risky. This will not sell for 60 rupees after a year. But I am thinking that this will be sold for 60 rupees or something else. I am more hopeful or I am more optimistic. Because of which I am getting a present value of 53.71. But the factors or determining characters in the market According to them, this is a bit more riskier as compared to how I am taking it. Because of which the forces of the market have reduced the value of this stock as compared to what I have come up with. So this is indicating that there could be a bit more risk, higher risk attached with this financial instrument as compared to what I took for my calculations. So there is this important thing that needs to be considered when we are planning to invest in a certain financial instrument after calculating the present value of all the future cash flows.