Valuing Stocks. Chapter 5. Debt versus Equity: Debt. Debt securities represent a legally enforceable claim. Debt securities offer fixed or floating cash flows. Bondholders do not have any control over how the company is run. Debt versus Equity: Equity.
Debt and equity have substantially different marginal benefits and marginal costs.
Preferred stock have some features similar to debt and other features similar to equity.
Promises a fixed annual dividend payment, though this is not legally enforceable.
Preferred stockholders usually do not have voting rights.
Little economic relevance today.
The shares of a company’s stock that shareholders and the board authorize the firm to sell to the public.
The shares of a company’s stock that have been issued or sold to the public.
The shares of a company’s stock that are currently held by the public.
The amount of money the firm received from selling stock, above and beyond the stock’s par value.
Additional paid-in capitalCommon Stock
Shareholders have no legal rights to receive dividends.
treasury stockPrimary Markets and Issuing New Securities
Key investment banking activities
Investment banks assist firms in the process of issuing securities to investors.
initial public offering (IPO)
competitively bid offer
Firm commitmentThe Investment Banker’s Role in Equity Issues
Firms can choose an investment bank through
The contract to sell equity can be
marketSecondary Markets for Equity Securities
An example: Investors require an 11% return on a preferred stock that pays a $2.30 annual dividend. What is the price?Stock Valuation: Preferred Stock
Preferred stock is an equity security that is expected to pay a fixed annual dividend indefinitely.
The zero growth model is the simplest approach to stock valuation that assumes a constant, non-growing dividend stream.
Commonly called the Gordon growth model
Dynasty Corp. pays a $3 dividend in one year. If investors expect that dividend to remain constant forever, and they require a 10% return on Dynasty stock, what is the stock worth?
What is the stock worth if investors expect Dynasty’s dividends to grow at 3% per year?
The net amount of cash flow remaining after the firm has met all operating needs and paid for investments, both long-term and short-term.
Free cash flow (FCF)
Weighted average cost of capital (WACC)
At the end of its 2006 fiscal year, Starbucks had
The value of a firm’s equity as recorded on the firm’s balance sheet.
Price/Earnings multiplesOther Approaches to Common Stock Valuation