Stock valuation33
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Stock valuation33

Stock valuation33

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Stock valuation33 Stock valuation33 Presentation Transcript

  • Chapter 8 - Stock Valuation  2005, Pearson Prentice Hall
  • Security Valuation
    • In general, the intrinsic value of an asset = the present value of the stream of expected cash flows discounted at an appropriate required rate of return .
  • Preferred Stock
    • A hybrid security :
    • It’s like common stock - no fixed maturity.
  • Preferred Stock
    • A hybrid security :
    • It’s like common stock - no fixed maturity.
      • Technically, it’s part of equity capital .
  • Preferred Stock
    • A hybrid security :
    • It’s like common stock - no fixed maturity.
      • Technically, it’s part of equity capital.
    • It’s like debt - preferred dividends are fixed.
  • Preferred Stock
    • A hybrid security :
    • It’s like common stock - no fixed maturity.
      • Technically, it’s part of equity capital.
    • It’s like debt - preferred dividends are fixed.
      • Missing a preferred dividend does not constitute default, but preferred dividends are cumulative .
    • Usually sold for $25, $50, or $100 per share.
    • Dividends are fixed either as a dollar amount or as a percentage of par value.
    • Example: In 1988, Xerox issued $75 million of 8.25% preferred stock at $50 per share.
      • $4.125 is the fixed, annual dividend per share.
    Preferred Stock
    • Firms may have multiple classes of preferreds, each with different features.
    • Priority : lower than debt, higher than common stock.
    • Cumulative feature : all past unpaid preferred stock dividends must be paid before any common stock dividends are declared.
    Preferred Stock Features
    • Protective provisions are common .
    • Convertibility : many preferreds are convertible into common shares.
    • Adjustable rate preferreds have dividends tied to interest rates.
    • Participation : some (very few) preferreds have dividends tied to the firm’s earnings.
    Preferred Stock Features
    • PIK Preferred : Pay-in-kind preferred stocks pay additional preferred shares to investors rather than cash dividends.
    • Retirement : Most preferreds are callable, and many include a sinking fund provision to set cash aside for the purpose of retiring preferred shares.
    Preferred Stock Features
  • Preferred Stock Valuation
    • A preferred stock can usually be valued like a perpetuity:
  • Preferred Stock Valuation
    • A preferred stock can usually be valued like a perpetuity:
    V = D k ps ps
  • Example:
    • Xerox preferred pays an 8.25% dividend on a $50 par value.
    • Suppose our required rate of return on Xerox preferred is 9.5% .
  • Example:
    • Xerox preferred pays an 8.25% dividend on a $50 par value.
    • Suppose our required rate of return on Xerox preferred is 9.5% .
    V ps = 4.125 .095 =
  • Example:
    • Xerox preferred pays an 8.25% dividend on a $50 par value.
    • Suppose our required rate of return on Xerox preferred is 9.5% .
    V ps = 4.125 .095 = $43.42
  • Expected Rate of Return on Preferred
    • Just adjust the valuation model:
  • Expected Rate of Return on Preferred
    • Just adjust the valuation model:
    D P o k ps =
  • Example
    • If we know the preferred stock price is $40 , and the preferred dividend is $4.125 , the expected return is:
  • Example
    • If we know the preferred stock price is $40 , and the preferred dividend is $4.125 , the expected return is:
    D P o k ps = = = 4.125 40
  • Example
    • If we know the preferred stock price is $40 , and the preferred dividend is $4.125 , the expected return is:
    D P o k ps = = = .1031 4.125 40
  • The Financial Pages: Preferred Stocks
    • 52 weeks Yld Vol
    • Hi Lo Sym Div % PE 100s Close
    • 27 88 25 06 GenMotor pfG 2.28 8.9 … 86 25 53
    • Dividend: $2.28 on $25 par value
    • = 9.12% dividend rate.
    • Expected return: 2.28 / 25.53 = 8.9%.
  • Common Stock
    • Is a variable-income security.
      • Dividends may be increased or decreased, depending on earnings.
    • Represents equity or ownership.
    • Includes voting rights .
    • Limited liability : liability is limited to amount of owners’ investment.
    • Priority : lower than debt and preferred.
  • Common Stock Characteristics
    • Claim on Income - a stockholder has a claim on the firm’s residual income.
    • Claim on Assets - a stockholder has a residual claim on the firm’s assets in case of liquidation.
    • Preemptive Rights - stockholders may share proportionally in any new stock issues.
    • Voting Rights - right to vote for the firm’s board of directors.
    • You expect XYZ stock to pay a $5.50 dividend at the end of the year. The stock price is expected to be $120 at that time.
    • If you require a 15% rate of return, what would you pay for the stock now?
    Common Stock Valuation (Single Holding Period)
    • You expect XYZ stock to pay a $5.50 dividend at the end of the year. The stock price is expected to be $120 at that time.
    • If you require a 15% rate of return, what would you pay for the stock now?
    Common Stock Valuation (Single Holding Period) 0 1 ? 5.50 + 120
  • Common Stock Valuation (Single Holding Period)
    • Solution:
    • Vcs = (5.50/1.15) + (120/1.15)
    • = 4.783 + 104.348
    • = $109.13
  • Common Stock Valuation (Single Holding Period)
    • Financial Calculator solution:
    • P/Y =1, I = 15, n=1, FV= 125.50
    • solve: PV = -109.13
    • or:
    • P/Y =1, I = 15, n=1, FV= 120,
    • PMT = 5.50
    • solve: PV = -109.13
  • The Financial Pages: Common Stocks
    • 52 weeks Yld Vol Net
    • Hi Lo Sym Div % PE 100s Hi Lo Close Chg
    • 135 80 IBM .52 .5 21 142349 99 93 94 96 -3 43
    • 82 18 CiscoSys … 47 1189057 21 19 20 25 -1 13
  • Common Stock Valuation (Multiple Holding Periods)
    • Constant Growth Model
    • Assumes common stock dividends will grow at a constant rate into the future.
  • Common Stock Valuation (Multiple Holding Periods)
    • Constant Growth Model
    • Assumes common stock dividends will grow at a constant rate into the future.
    V cs = D 1 k cs - g
    • Constant Growth Model
    • Assumes common stock dividends will grow at a constant rate into the future.
    • Constant Growth Model
    • Assumes common stock dividends will grow at a constant rate into the future.
    V cs = D 1 k cs - g
    • Constant Growth Model
    • Assumes common stock dividends will grow at a constant rate into the future.
    • D 1 = the dividend at the end of period 1.
    • k cs = the required return on the common stock.
    • g = the constant, annual dividend growth rate.
    V cs = D 1 k cs - g
  • Example
    • XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15% ?
  • Example
    • XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15% ?
    D 0 = $5, so D 1 = 5 (1.10) = $5.50
  • Example
    • XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15% ?
    V cs =
  • Example
    • XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15% ?
    V cs = = D 1 k cs - g
  • Example
    • XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15% ?
    V cs = = = D 1 5.50 k cs - g .15 - .10
  • Example
    • XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15% ?
    V cs = = = $110 D 1 5.50 k cs - g .15 - .10
  • Expected Return on Common Stock
    • Just adjust the valuation model
  • Expected Return on Common Stock
    • Just adjust the valuation model
    V cs = D k cs - g
  • Expected Return on Common Stock
    • Just adjust the valuation model
    V cs = D k cs - g k = ( ) + g D 1 V cs
  • Expected Return on Common Stock
    • Just adjust the valuation model
    V cs = D k cs - g k = ( ) + g D 1 P o
  • Example
    • We know a stock will pay a $3.00 dividend at time 1, has a price of $27 and an expected growth rate of 5% .
  • Example
    • We know a stock will pay a $3.00 dividend at time 1, has a price of $27 and an expected growth rate of 5% .
    k cs = ( ) + g D 1 P o
  • Example
    • We know a stock will pay a $3.00 dividend at time 1, has a price of $27 and an expected growth rate of 5% .
    k cs = ( ) + g D 1 P o k cs = ( ) + .05 = 3.00 27
  • Example
    • We know a stock will pay a $3.00 dividend at time 1, has a price of $27 and an expected growth rate of 5% .
    k cs = ( ) + g D 1 P o k cs = ( ) + .05 = 16.11% 3.00 27