valuation and characteristics of common stocks l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Valuation and Characteristics of Common Stocks PowerPoint Presentation
Download Presentation
Valuation and Characteristics of Common Stocks

Loading in 2 Seconds...

play fullscreen
1 / 9

Valuation and Characteristics of Common Stocks - PowerPoint PPT Presentation


  • 125 Views
  • Uploaded on

Valuation and Characteristics of Common Stocks. Financial Management B 642. Outline. What are stocks? Types of Stocks Preferred Stock Common Stock Characteristics of Preferred Stocks Characteristics of Common Stocks How to value a Preferred Stock? How to value a Common Stock?.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Valuation and Characteristics of Common Stocks' - eman


Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
outline
Outline
  • What are stocks?
  • Types of Stocks
    • Preferred Stock
    • Common Stock
  • Characteristics of Preferred Stocks
  • Characteristics of Common Stocks
  • How to value a Preferred Stock?
  • How to value a Common Stock?
what is a stock
What is a Stock?
  • Stocks represent ownership capital
  • Stockholders are part owners of the company
types of stocks
Types of Stocks
  • Preferred Stocks
    • A stock that enjoys preference over common stockholders in terms of payment of dividend and in terms of distribution of assets in case of liquidation of the firm
    • A hybrid security
      • Has features of both common stock and a bond
      • Pays a fixed rate of dividend each year (like coupon on a bond) and
      • Has infinite life (like common stock)
      • Non payment of dividend does not bring bankruptcy
      • Dividends cannot be deducted from firm’s income for tax purposes
      • Cumulative Dividend
how to value preferred stock
How to value preferred stock?
  • Present value of anticipated/expected cash flows when discounted at the required rate of return by the preferred stockholders
  • What cash flows are anticipated by preferred stockholders?
    • Dollar amount of dividend every year for an infinite time period
  • Value of Preferred Stock = PV of anticipated dividend discounted at the required rate of return
  • Examples
common stocks
Common Stocks
  • Common Stock
    • Common stockholders are the true owners of the company
    • Entitled to dividend if and when declared by the board of directors
    • Entitled to vote at the annual general meetings of the firm
    • They have the last claim on the assets of the firm after paying off creditors and bond holders and preferred stockholders
    • They are also residual owners
how to value common stock
How to value common stock?
  • PV of expected cash flows for common stockholders when discounted at the required rate of return for the common stockholders
  • What cash flows are expected by common stockholders?
    • An unequal stream of dividends for each year
  • Value of Common Stock = PV of dividends for common stock holders
  • Simplifying Assumptions to Value Common Stock
    • Zero Growth Model
    • Constant Growth Model
zero growth model
Zero Growth Model
  • If we assume that dividend for common stockholder will be the same every year
  • DIV1 = DIV2 =DIV3=……=DIV
  • Under zero growth model, stockholders anticipate to receive the same amount of dividend per year forever
  • Thus, we have a perpetuity of dividends
  • Price of Stock will equal the present value of this perpetuity
  • Examples
constant growth model
Constant Growth Model
  • If we assume that dividends grow at a constant rate of ‘g’ per year forever

DPS1

P0 = ---------

r - g