Stocks and Their Valuation: Introduction Common stock represents the (-Select-creditor ownershipmanagement) position in a firm, and is valued as the present valueof its expected future (-Select-dividend interest FCF) stream.Common stock dividends (-Select-are always, may be, are no)specified by contract—they depend on the firm's earnings. Twomodels are used to estimate a stock's intrinsic value: thediscounted dividend model and the corporate valuation model. The (-Select-corporate valuation discounted dividend) modelvalues a common stock as the present value of its expected futurecash flows at the firm's required rate of return on equity.Variations of this model are used to value constant growth stocks,zero growth stocks, and nonconstant growth stocks. The (-Select-corporate valuation, discounted dividend) model isan alternative model used to value a firm, especially one that doesnot pay dividends or is privately held. This model calculates thefirm's (-Select-common stock dividends bond principal payments freecash flows) , and then finds their present values at the firm'sweighted average cost of capital to determine a firm's value. Which of the following statements is correct? The only difference between the discounted dividend andcorporate valuation models is the expected cash flow stream.Expected future dividends are the cash flow stream in thediscounted dividend model and expected free cash flows are the cashflow stream in the corporate valuation model. Both models use thesame discount rate to calculate the present value of the cash flowstream. The discounted dividend model is especially suited for valuingcompanies that are privately held. The only difference between the discounted dividend andcorporate valuation models is the discount rate used to calculatethe present value of the cash flow stream. The discount rate usedin the discounted dividend model is the firm's required rate ofreturn on equity, while the discount rate used in the corporatevaluation model is the firm's weighted average cost of capital.Both models use the same expected cash flow stream in thediscounting process. There are actually two differences between the discounteddividend and corporate valuation models: the expected cash flowstream and the discount rate used in the models are different. Thediscounted dividend model calculates the firm's stock price as thepresent value of the expected future dividends at the firm'srequired rate of return on equity, while the corporate valuationmodel calculates the firm's stock price as the present value of theexpected free cash flows at the firm's weighted average cost ofequity.