This chapter applies the lessons learned from the last two chapters to valuing stocks and businesses. The chapter begins with a description of market activities related to stock trading and follows this with an explanation of stock valuation. Unlike bonds, stocks do not have specified cash flows; however, the value of a share can be seen as the present value of the dividends paid by the stock. This principle of stock valuation, with some modifications, can be applied to valuing businesses in general. The value of any asset is the present value of the free cash flows generated by the asset. The discount rate for computation of the present value should be the required rate of return demanded by the investors for investing in the asset.

The chapter describes three equivalent ways of looking at the value of a stock: i) as the present value of future dividends, ii) as the present value of free cash flow, and iii) as present value of current earnings plus the present value of growth opportunities. The current market price of a stock can be used to estimate the market capitalization rate or the investors' expected rate of return on the stock. This rate is of practical application in setting rates for regulated utilities and other industries.