1 / 11

Valuation of Stocks

Valuation of Stocks. Asset Valuation. Asset Value as Present Value of the Cash Flows it will produce:. Stocks Features. Represents (residual) ownership. Ownership implies control. Stockholders elect directors. Directors elect management. Management’s goal: Maximize stock price.

lawrencey
Download Presentation

Valuation of Stocks

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. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Valuation of Stocks Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  2. Asset Valuation • Asset Value as Present Value of the Cash Flows it will produce: Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  3. Stocks Features • Represents (residual) ownership. • Ownership implies control. • Stockholders elect directors. • Directors elect management. • Management’s goal: Maximize stock price. • Stocks certificate represent proportional ownership. • Stocks certificate entitle its holders to proportional distributions (mainly dividend), if there are any. Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  4. The Discounted Dividend Model • A discounted dividend model is any model that computes the value of a share of a stock as the present value of the expected future cash dividends • Using (1) above: Let: P0 be the present stock price, Dt - Cash dividend per share at time t r – discount rate Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  5. The Discounted Dividend Model • Alternative view of the Model. • Assume a risk less environment • Every investor takes a position in a stock for one period only. • P1 -the price the next investor will pay for the stock in period 1, after dividend in that period is paid • Repeated substitution will result in (2) Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  6. The Dividend Model • Case 1: Constant DividendWhen all dividends are the sameD0 = D1 = D2 = …. • The dividend stream is treated as a perpetuity Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  7. Dividend Growth Model • Case 2: Constant Growth Dividend • When dividend grow at constant growth rate g from D1 and on and g<r(normal growth) • D2 = D1(1+g)D3 = D2(1+g) = D1(1+g)2 • The dividend stream is treated as a constant growth perpetuity Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  8. Dividend Growth Model • Case 3: Limited abnormal growth continued by Constant Growth Dividend • Let dividend grow at g1> r rate for t periods, and from t+1 grow forever at a constant growth rate g2< r . • Compute (6.1) Dt+1= Dt (1+ g2) = D0(1+ g1)t (1+ g2) Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  9. Dividend Growth Model • Which can be substituted with a growing annuity Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  10. Where is Growth Coming from ? • Review:Net Income = Retained earning + Dividend • Retained earning are additions to equity, therefore, next period the increase in NI = ROE * Retained earning • Therefore, growth (7) g= ROE*(Retention Ratio) Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

  11. Price and Investment Opportunities • The price of a stock that pays out 100% of its earning : • If the firm decides to retain earning and invest in new project, its value will increase by exactly the projects’ NPV. Fin 307-Stocks Valuation | Dr. Menahem Rosenberg

More Related