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Explain the main approaches for securities valuations demonstrated in the paper of MM

There are four main approaches for security valuation discussed in the MM paper, the discounted
cash flow approach, the current earnings & future investment approach, the stream of dividends
approach and the stream of earnings approach
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Perfect capital markets- No buyer or seller alone can influence market ruling price, or hold
more information than others
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2
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3
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Under these assumptions, the price of each share must be such that the rate of return on every
share will be the same throughout the market over any given interval of time
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We refer to this as the point of reference formula
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MM uses an example of valuing any
specific machine where we discount at the market rate of interest the stream of cash receipts
generated by the machine plus any scrap or terminal value of the machine; minus the stream of cash
outlays for direct labour, materials, repairs and capital additions
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The investments opportunity approach
Under this approach MM looks at the standpoint of an investor proposing to buy out and operate
some already going concern
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For investors, the value of firm depends upon:
1
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2
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The opportunity, if any, that the firm offers for making additional investments in real assets
that will yield more than the normal rate of return
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2) Refers to the future ability of the company to exploit further investment opportunities
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We restate in terms of total market value as:

Where
is the portion of the total dividends
paid during period
that accrues to the shares of record as of the start of period t
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The
definition overlooks the fact that firm is a separate entity and these profits cannot freely be
withdrawn by shareholders
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The capital to be raised in any future period is I(t) and its opportunity cost, no matter how financed,
is P% per period thereafter
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To conclude, the paper states that all these approaches converge to our reference formula where
the results will be equivalent

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