Valoracion Instrumentos Financieros

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Valoracion Instrumentos Financieros

  1. 1. VALORATING FINANCIAL INSTRUMENT BOND STOCK RISK, RATE OF RETURN AND CAPITAL COST
  2. 2. BONDS <ul><li>Bond – Security that obligates the issuer make specified payments to the bondholder. </li></ul><ul><li>Coupon – The interest payments paid to the bondholder. </li></ul><ul><li>Face Value – Payment at the maturity of the bond. Also called par value or maturity value. </li></ul><ul><li>Coupon Rate – Annual interest payments a percentage of face value. </li></ul>
  3. 3. BOND PRICES AND YIELDS <ul><li>PV = PV(coupons) + PV(face value) </li></ul><ul><li>= (coupon x annuity factor) + (face value x discount factor). </li></ul><ul><li>Example: In 1999, Treasury bonds with 3-year maturities offered a return of about 5.6%; face value = $1,000; coupon rate = 6%; coupon = $60. </li></ul>
  4. 4. RATE OF RETURN <ul><li>Rate of Return – Total income per period per dollar invested. </li></ul>
  5. 5. VARIATION IN CORPORATE BONDS <ul><li>Zero-Coupon Bonds – coupon rate = 0; do not receive a regular coupon payment. These bonds are issued at prices considerably below face value. </li></ul><ul><li>Floating-Rate Bonds – coupon payments are tied to some measure of current market rates. The rate might be reset once a year to the current Treasury bill rate plus 2 percent. </li></ul><ul><li>Convertible Bonds – you can choose later to exchange it for a specified number of share of common stock. </li></ul>
  6. 6. STOCK VALORATION STOCK MARKET
  7. 7. COMMON STOCK <ul><li>Common stock – Ownership shares in a publicly held corporation. </li></ul><ul><li>Primary Market – Market for newly-issued securities, sold by the company to raise cash. </li></ul><ul><li>Initial Public Offering (IPO) – First offering of stock to the general public. </li></ul><ul><li>Secondary Market – Market in which already-issued securities are traded among investors. </li></ul>
  8. 8. COMMON STOCK <ul><li>Dividend – Periodic cash distribution from the firm to its shareholders. </li></ul><ul><li>Price-Earnings (P/E) – Ratio of stock price to earnings per share. </li></ul><ul><li>Book Value – Net worth of the firm according to the balance sheet. </li></ul><ul><li>Liquidation Value – Net proceeds that would be realized by selling the firm’s assets and paying off its creditors. </li></ul>
  9. 9. COMMON STOCK VALORATION <ul><li>Today price = </li></ul><ul><li>Tomorrow price = </li></ul><ul><li>Expected return = </li></ul>
  10. 10. DIVIDEND DISCOUNT MODEL <ul><li>With no growth = </li></ul><ul><li>If all earning were distributed like dividend, we’ll found </li></ul>
  11. 11. THE CONSTANT GROWTH DIVIDEND DISCOUNT MODEL <ul><li>Definition – Version of the dividend discount model in which dividends grow at a constant rate. </li></ul><ul><li>Expected Rates of Return = </li></ul><ul><li>r = dividend yield + growth rate. </li></ul>
  12. 12. GROWTH STOCKS AND INCOME STOCKS <ul><li>Payout Ratio – Fraction of earnings paid out as dividends. </li></ul><ul><li>P/R – g = %DIV + earning per share (E/P). </li></ul><ul><li>Plowback Ratio – Fraction of earnings retained by the firm. </li></ul><ul><li>Return=g=returns on equity x plowback ratio </li></ul>
  13. 13. VALUING ENTIRE BUSINESSES <ul><li>VEB = PV = Capital value/(r-g) </li></ul><ul><li>Example: Suppose 20,000 common stock outstanding and paid dividend by $2 per share. Investor expect a steady dividend growth of 4% a year and required a return of 9%. So the total value of the firm will be: PV = 40,000/(.09-.04) = $800,000. Also we can get PV = number of shares outstanding x market price of share. </li></ul>
  14. 14. RISK, RETURN, AND CAPITAL COST RATE OF RETURN MARKET INDEXES MEASURING RISK
  15. 15. RATES OF RETURN <ul><li>The percentage return on the investment would be: </li></ul><ul><li>Example: Supose that you bought stock from GE at the beginning of 2002 at $102 a share. By the end of the year the value of that investment had appreciated to $155 (capital gain = $53). In addition, in 2002 GE paid a dividend of $1.46 per share. The result would be like follow: </li></ul><ul><li>PR = (CG + Div.)/IPS = (53+1.49)/102 = .534 or 53.4% </li></ul>
  16. 16. RATES OF RETURN CONT… <ul><li>Dividend yield = dividend/initial share price </li></ul><ul><li>Percentage capital gain = capital gain/initial share price </li></ul><ul><li>1+real rate of return = (1+nominal rate of return)/(1+inflation rate) </li></ul>
  17. 17. MARKET INDEXES <ul><li>Market Index – Measure of the investment performance of the overall market. </li></ul><ul><li>Dow Jones Industrial Average – Index of the investment performance of a portfolio of 30 large industrial stock. </li></ul><ul><li>Standard & Poor’s Composite Index – Index on the investment performance of a portfolio of 500 large stocks. Also called the S&P 500. </li></ul>
  18. 18. PREMIUM <ul><li>Maturity Premium – Extra average return from investing in long-term versus short-term Treasury securities. </li></ul><ul><li>Risk Premium – Expected return in excess of risk-free return as compensation for risk. </li></ul><ul><li>Rate of Return on Common Stock = Interest rate on Treasury bills + Market risk premium. </li></ul>
  19. 19. MEASURING RISK <ul><li>Expected return – probability (weighted average of possible outcomes) </li></ul><ul><li>Variance – Average value of squared deviations from mean. A measure of volatility. </li></ul><ul><li>Standard Deviation – Square root of variance. Another measure of volatility. </li></ul>
  20. 20. EXAMPLE 801.84 135.53 Total 14.67 3.83 28.56 2001 74.13 8.61 33.36 2000 2.82 -1.68 23.07 1999 160.78 12.68 37.43 1998 549.43 -23.44 1.31 1997 Squared Dev. Dev. From Ave. Ret. Rate of Return Year
  21. 21. EXAMPLE CONT…. <ul><li>Variance = 801.84/5 = 160.37 </li></ul><ul><li>Standard Deviation = square root of 160.37 = 12.66% </li></ul>
  22. 22. RISK AND DIVERSIFICATION <ul><li>Diversification – Strategy designed to reduce risk by spreading the portfolio across many investment. </li></ul><ul><li>Unique Risk – Risk factors affecting only that firm. Also called diversifiable risk. </li></ul><ul><li>Market Risk – Economy wide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk. </li></ul>
  23. 23. EXAMPLE PORTFOLIO ANALYSIS 3.9% 16.4% 10.6% Stand. Dev. 15.2 268.7 112.7 Variance 4% 1% 5% Expected Return +8.5% -20% +18% 1/3 Boom +4.5% +3% +5% 1/3 Normal -1% +20% -8% 1/3 Recession Portfolio Return% Gold Stock Auto Stock Probability Scenario
  24. 24. PORTFOLIO RATE OF RETURN <ul><li>Portfolio rate of return = (Fraction of portfolio in first asset x rate of return on first asset) + (Fraction of portfolio in second asset x rate of return on second asset) </li></ul><ul><li>For example if the investor diversified the portfolio and invested 75% in autos and 25% in gold, the portfolio return will be: Portfolio return in recession = [.75 x (-8%)] + [.25 x (20%)] = -1%. </li></ul>

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