CHAPTER 5 Stocks and Their Valuation . Features of common stock Determining common stock values Preferred stock. Common Stock. Stockholders are owners of the firm. Stockholders are residual claimants. Stockholders have the right to: vote at company meetings
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Features of common stock
Determining common stock values
U. S. Stock Market
Expect stock to appreciate in value
Expect stock to decline in value
Sell stock without first owning it.
Borrow stock from your broker with the promise to repay it at some later date.
Sell the borrowed stock.
Repurchase it at a later date to repay your broker.
Responsible for all dividends and other distributions while short the stock.Transactions Involving Stocks
From “The Time Value of Money” we realize that the value of anything is based on the present value of the cash flows the asset is expected to produce in the future.
Terms:Required Rate of Return
Dividend yield= D1/ P0 = 2 / 40 =5%
Dividend yield= D1/ P0 = ?
D1 = D0 (1+g)1
D2 = D0 (1+g)2
Dt = D0 (1+g)t
P0 = D0(1+g) / (Ks – g) = 2(1.10)/(0.15-0.1) =44
P0 = ???
A share just paid a dividend of $10. The dividend is expected to grow at 40 percent for the next three years. After that, dividend is expected to grow at a constant rate of 10 percent forever. The required rate of return is 20 percent. Calculate the value of this stock.
Lowell Inc. is going public soon. It is expected to earn $5 per share this year (EPS = $5). If a similar firm has a P/E ratio of 10, what should the value of Lowell Inc.’s stock?
P0 = 5 * 10 = $50
Lowell Inc. is going public soon. It is expected to earn $6 cash per share this year (CF = $6). If a similar firm has a P/CF ratio of 15, what should the value of Lowell Inc.’s stock?
P0 = ?
Lowell Inc. is going public soon. It is expected to have a sales of $10 million this year. It has 1 million shares outstanding. If a similar firm has a P/Sales ratio of 5, what should the value of Lowell Inc.’s stock?
P0 = ?