CHAPTER 9 Stocks and Their Valuation. Features of common stock Determining common stock values Preferred stock. Facts about common stock. Represents ownership Ownership implies control Stockholders elect directors Directors elect management. Corporate Organization. 1 3.
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CHAPTER 9Stocks and Their Valuation
Features of common stock
Determining common stock values
Preferred stock
13
Div 1
Div 2
Div 3
Div ∞
k%
k%
k%
k%
Pmt 1
Pmt 2
Pmt 3
Pmt 20
+
k%
k%
k%
k%
D1 = D0 (1+g)1
D2 = D1 (1+g)1
D3 = D2 (1+g)1
0
1
2
3
g = 6%
2.12A
2.247B
2.382C
D0 = 2.00
1.8761
rs = 13%
1.7599
1.6509
∞
Div ∞
rs%
A, D1= D0(1+g)1
= 2.00 (1+0.06)
= 2.12
B, D2= D1(1+g)1
= 2.12(1+0.06)
= 2.247
C, D3= D2(1+g)1
= 2.247 (1+0.06)1
= 2.382
D1 = D0 (1+g)1
D2 = D1 (1+g)1
D3 = D2 (1+g)1
A , D0 (1+g)
= 2.0 (1+0.06)
= 2.12
0
1
2
3
rs = 13%
...
2.00
2.00
2.00
*
* P0 = D
rsg
If g = 0
D1
g= 30%
∞
g= 6%
D∞
D2
D3
D4
rs%
rs%
rs%
P3; Present value of
all future cash
flows to be
received beyond Yr 3
rs%
P3= D4
rsg
= D3 (1+6%)
rsg
0
1
2
3
4
rs = 13%
...
g = 30%
g = 30%
g = 30%
g = 6%
D0 = 2.00 2.600 3.380 4.394
4.658
2.301
2.647
3.045
4.658A
=
=
$66.54
46.114B
3

0.13
0.06
54.107 = P0
rs=13%, n=1
rs=13%, n=2
A= D3 (1+g)
= 4.394(1+6%)
= 4658
rs=13%, n=3
$
rs=13%, n=3
P
^
B: FV=66.54, n=3, I/yr=13%, PV=?
0
1
2
3
4
rs = 13%
...
g = 0%
g = 0%
g = 0%
g = 6%
D0 = 2.00 2.00 2.00 2.00
2.12
1.77
1.57
1.39
2.12
$
P
=
=
$30.29
20.99
3

0.13
0.06
^
25.72 = P0
rs=13%, n=1
rs=13%, n=2
rs=13%, n=3
rs=13%, n=3
D1
G= 40%
G= 7%
D∞
D2
D3
D4
D5
D6
P5; Present value of
all future cash
flows to be
received beyond Yr 5
P5= D6
rsg
= D5 (1+7%)
rsg
What are the expected dividend yield, capital gains yield, and total return during the first year(assume D1 = 2.12, P1 = 32.10 & P0 = 30.29)?
= D1 / P0 = $2.12 / $30.29 = 7.0%
= (P1 – P0) / P0
= ($32.10  $30.29) / $30.29 = 6.0%
= Dividend Yield + Capital Gains Yield
= 7.0% + 6.0% = 13.0%
If a preferred stock pays an annual dividend of RM5 a share and market interest rate is 10%, what is the preferred stock’s current price?
Vp = D/rp
D= 5
rp=10% , Vp= RM5/ 10%
Vp = RM50
Vp = D / rp
$50= $5 / rp
rp = $5 / $50
= 0.10 = 10%
^
D∞
D0
D1
D2
One year from now to determine the intrinsic value(p1)
Today
If today: P0 = D1
rs  g
If one year: P1 = D2
from now rs  g
*
*D2= D1 (1+g)
= 2.12 (1+0.06)
= 2.247
*D1= D0 (1+g)
= 2.00 (1+0.06)
= 2.12
FCF= NOPAT – Net capital invest
FCF = [EBIT(1T) + Depreciation exp]
 [ capital exp + working capital]
0
1
2
3
4
r = 10%
...
g = 6%
5 10 20
21.20
4.545
8.264
15.026
21.20
398.197
530 = = TV3
0.10

0.06
416.942
* FCF Y1= 5
Y2= 10
Y3= 20
= $416.94  $40
= $376.94 million
= $376.94 / 10
= $37.69