chapter 7 stock valuation l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 7 Stock Valuation PowerPoint Presentation
Download Presentation
Chapter 7 Stock Valuation

Loading in 2 Seconds...

play fullscreen
1 / 17

Chapter 7 Stock Valuation - PowerPoint PPT Presentation


  • 221 Views
  • Uploaded on

Chapter 7 Stock Valuation. Common Stock Basics Stock Valuation – Future Cash Flows Dividend Pricing Models Dividend Growth Models Changing Dividend Patterns Preferred Stock CAPM Beta Common Stock Features. Common Stock Basics. Common Stock – Ownership of Company Equity financing

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 'Chapter 7 Stock Valuation' - yul


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
chapter 7 stock valuation
Chapter 7Stock Valuation
  • Common Stock Basics
  • Stock Valuation – Future Cash Flows
  • Dividend Pricing Models
  • Dividend Growth Models
  • Changing Dividend Patterns
  • Preferred Stock
  • CAPM
  • Beta
  • Common Stock Features
common stock basics
Common Stock Basics
  • Common Stock – Ownership of Company
    • Equity financing
    • Major financing source for companies
  • Voting Rights
    • Pick the management team of the company
    • Determine charter and changes to charter
  • Receive Dividends
    • Payment of “profits”
    • Principal not repaid until shareholder sells stock
stock valuation
Stock Valuation
  • Just like a bond…the value is all future cash flows received
  • Final payment (when stock is sold) is the same as principal repayment
  • Dividends are the same as coupons
dividend pricing models
Dividend Pricing Models
  • Four Models
    • Two assumptions
      • Growth, constant or no-growth dividend or dividend growing at a constant rate
      • Horizon, finite or infinite
  • Constant Dividend and Infinite Horizon
    • Priced as a perpetuity
    • Price = Dividend / r
    • r is the desired rate of return on investment
dividend pricing models5
Dividend Pricing Models
  • Constant Dividend with Finite Horizon
    • Assumption on final payment
      • Dividends Only – Only annuity stream formula
      • Dividends and Final Sale at end of horizon – Annuity Stream and Lump Sum formula
    • TVM equations
  • Finding Bond Selling Price
    • New owner buys remaining dividend stream
    • Perpetuity for new owner?
dividend growth models
Dividend Growth Models
  • Common practice to raise dividends each year
    • Example, Coca-Cola
    • Dividend changes range
      • $0.04 to $0.08
      • 5.88% to 14.71%
    • Not constant…but…
    • Smooth out pattern for constant percentage change each year
  • Constant percentage change allows for a simplified pricing model
dividend growth models7
Dividend Growth Models
  • First Constant Growth Model – Infinite Horizon
    • Need g, the dividend growth rate
    • Need r, the require rate of return
    • Both stated on annual basis
dividend growth models8
Dividend Growth Models
  • Finding g,
    • Averaging annual dividend changes
    • g = (Last Dividend / First Dividend)1/n
      • n is the number of dividend changes
      • Example of Johnson and Johnson, g = 13.8%
  • Select r, example J&J, r = 15%
dividend growth models9
Dividend Growth Models
  • Adjusted for Finite Horizon
    • Dividend stream for a fixed period of time but still has constant growth, g>0
    • Shareholder only gets a portion of infinite dividend stream
  • Add portion adjustment to model
changing dividend patterns
Changing Dividend Patterns
  • What happens when g is not constant or the dividends are not constant?
  • Look for patterns inside the overall dividend stream
    • Series of dividends with constant dividends
    • Series of dividends with constant growth
  • Apply models within the series finding PV of the series
  • Add up all present value pieces for price
preferred stock
Preferred Stock
  • Preferred stock has stated annual dividend
    • Constant dividend each period
    • Dividend = dividend rate x par value
  • Preferred stock has no maturity date
    • Infinite horizon
    • No payment of par value
  • Fits constant dividend model with infinite horizon
slide12
CAPM
  • Capital Asset Pricing Model – CAPM
  • Future cash flows (dividends)
    • Difficult to predict
    • May not follow nice patterns
  • More encompassing model
  • CAPM – Expected return is directly related to risk (Chapter 5, Risk and Return)
  • Model works with returns
slide13
CAPM
  • Assumptions
    • #1 – There is a reward for waiting
    • #2 – The greater the risk the greater the expected reward
    • #3 – There is a constant tradeoff between risk and reward
  • E(return) = risk-free rate + slope (level of risk)
  • Trick is to find the level of risk for an investment
slide14
Beta
  • Beta – A measure of risk
    • The systematic risk of an individual asset in a well-diversified portfolio
    • Correlation between an asset’s returns and the market in general
    • Estimated with OLS regression
  • Beta’s
    • Less than 1, 1 or greater than 1
    • Less risk than market, same risk as market, greater risk than the market
slide15
Beta
  • Using Beta
    • Security Market Line
    • All firms plot on SML (ex-ante)
      • Firms above the line are under priced
      • Firms below the line are over priced
  • Security Market Line estimates expected returns
common stock features
Common Stock Features
  • Claim on Assets and Cash Flows (Residual)
  • No Maturity Date
  • Vote (Voice in Management)
  • Tax Issues – Dividends Taxable
  • Other Issues
    • Authorized, Outstanding, Treasury Shares
    • Pre-emptive Rights
problems
Problems
  • Problem 1 – Constant Dividend, Infinite Horizon
  • Problem 2 – Constant Dividend, Infinite Horizon
  • Problem 3 – Constant Dividend, Infinite Horizon
  • Problem 5 – Constant Growth, Infinite Horizon
  • Problem 7 – Constant Growth, Finite Horizon
  • Problem 11 – Preferred Stock
  • Problem 15 – Security Market Line
  • Problem 17 – Expected Returns