Chapter 6 Valuing Stocks Mila Getmansky Sherman
Topics Covered <ul><li>Stocks and the Stock Market </li></ul><ul><li>Book Values, Liquidation Values and Market Values </l...
Stocks & Stock Market <ul><li>Primary Market  - Place where the sale of new stock first occurs. </li></ul><ul><li>Initial ...
Stocks & Stock Market <ul><li>Common Stock  - Ownership shares in a publicly held corporation. </li></ul><ul><li>Secondary...
Stocks & Stock Market <ul><li>Book Value  - Net worth of the firm according to the balance sheet. </li></ul><ul><li>The di...
Stocks & Stock Market <ul><li>Liquidation Value  - Net proceeds that would be realized by selling the firm’s assets and pa...
Valuing Common Stocks <ul><li>Expected Return   - The percentage yield that an investor forecasts from a specific investme...
Valuing Common Stocks <ul><li>The formula can be broken into two parts. </li></ul><ul><li>Dividend Yield  +  Capital Appre...
Opportunity Costs <ul><li>Securities with similar risks should have the same returns </li></ul><ul><li>If returns are diff...
Valuing Common Stocks <ul><li>Dividend Discount Model  - Computation of today’s stock price which states that share value ...
Valuing Common Stocks <ul><li>Example </li></ul><ul><li>Current forecasts are for XYZ Company to pay dividends of $3, $3.2...
Valuing Common Stocks <ul><li>Example </li></ul><ul><li>Current forecasts are for XYZ Company to pay dividends of $3, $3.2...
Valuing Common Stocks <ul><li>Stock price = PV (all future dividends per share) </li></ul>
Valuing Common Stocks <ul><li>If we forecast no growth, and plan to hold out stock indefinitely, we will then value the st...
Valuing Common Stocks <ul><li>Constant Growth DDM  - A version of the dividend growth model in which dividends grow at a c...
Valuing Common Stocks <ul><li>Example </li></ul><ul><li>What is the value of a stock that expects to pay a $3.00 dividend ...
Valuing Common Stocks <ul><li>Example- continued </li></ul><ul><li>If the same stock is selling for $100 in the stock mark...
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Chapter 6 Valuing Stocks Mila Getmansky Sherman

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  • Chapter 6 Valuing Stocks Mila Getmansky Sherman

    1. 1. Chapter 6 Valuing Stocks Mila Getmansky Sherman
    2. 2. Topics Covered <ul><li>Stocks and the Stock Market </li></ul><ul><li>Book Values, Liquidation Values and Market Values </li></ul><ul><li>Valuing Common Stocks </li></ul><ul><li>Simplifying the Dividend Discount Model </li></ul>
    3. 3. Stocks & Stock Market <ul><li>Primary Market - Place where the sale of new stock first occurs. </li></ul><ul><li>Initial Public Offering (IPO) - First offering of stock to the general public. </li></ul><ul><li>Seasoned Issue - Sale of new shares by a firm that has already been through an IPO </li></ul>
    4. 4. Stocks & Stock Market <ul><li>Common Stock - Ownership shares in a publicly held corporation. </li></ul><ul><li>Secondary Market - market in which already issued securities are traded by investors. </li></ul><ul><li>Dividend - Periodic cash distribution from the firm to the shareholders. </li></ul><ul><li>Dividend Yield – Annualized dividend divided by the closing price. </li></ul><ul><li>P/E Ratio - Price per share divided by earnings per share. </li></ul>
    5. 5. Stocks & Stock Market <ul><li>Book Value - Net worth of the firm according to the balance sheet. </li></ul><ul><li>The difference between the book value of the assets and the liabilities </li></ul><ul><li>The book value of the firm’s equity </li></ul><ul><li>Book value records all the money that a company has raised from its shareholders plus all the earnings that have been plowed back </li></ul>
    6. 6. Stocks & Stock Market <ul><li>Liquidation Value - Net proceeds that would be realized by selling the firm’s assets and paying off its creditors. </li></ul><ul><li>Market Value Balance Sheet - Financial statement that uses market value of assets and liabilities. It is forward looking. </li></ul>
    7. 7. Valuing Common Stocks <ul><li>Expected Return - The percentage yield that an investor forecasts from a specific investment over a set period of time. Sometimes called the holding period return (HPR). </li></ul>
    8. 8. Valuing Common Stocks <ul><li>The formula can be broken into two parts. </li></ul><ul><li>Dividend Yield + Capital Appreciation </li></ul>
    9. 9. Opportunity Costs <ul><li>Securities with similar risks should have the same returns </li></ul><ul><li>If returns are different for similar securities, then securities are incorrectly priced </li></ul>
    10. 10. Valuing Common Stocks <ul><li>Dividend Discount Model - Computation of today’s stock price which states that share value equals the present value of all expected future dividends. </li></ul><ul><li>H - Time horizon for your investment. </li></ul>
    11. 11. Valuing Common Stocks <ul><li>Example </li></ul><ul><li>Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12% expected return? </li></ul>
    12. 12. Valuing Common Stocks <ul><li>Example </li></ul><ul><li>Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12% expected return? </li></ul>
    13. 13. Valuing Common Stocks <ul><li>Stock price = PV (all future dividends per share) </li></ul>
    14. 14. Valuing Common Stocks <ul><li>If we forecast no growth, and plan to hold out stock indefinitely, we will then value the stock as a PERPETUITY . </li></ul>Assumes all earnings are paid to shareholders.
    15. 15. Valuing Common Stocks <ul><li>Constant Growth DDM - A version of the dividend growth model in which dividends grow at a constant rate (Gordon Growth Model) . </li></ul>Assumes that r>g
    16. 16. Valuing Common Stocks <ul><li>Example </li></ul><ul><li>What is the value of a stock that expects to pay a $3.00 dividend next year, and then increase the dividend at a rate of 8% per year, indefinitely? Assume a 12% expected return. </li></ul>
    17. 17. Valuing Common Stocks <ul><li>Example- continued </li></ul><ul><li>If the same stock is selling for $100 in the stock market, what might the market be assuming about the growth in dividends? </li></ul>Answer The market is assuming the dividend will grow at 9% per year, indefinitely.

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