This is the fourth presentation for the University of New England Graduate School of Business unit, GSB711 - Managerial Finance. This presentation looks at returns on different types of investment.
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
Feel Free to comment.
Bond Valuation, Bond Types, Bond Characteristics, Reasons for issuing Bonds, Bond Risks, Bond Measuring Yield, Bond Pricing Theorems, Factors that Influence Bond Prices, Primary Bond Market, Secondary Bond Market, Bonds in Nepal.
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall.
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
Feel Free to comment.
Bond Valuation, Bond Types, Bond Characteristics, Reasons for issuing Bonds, Bond Risks, Bond Measuring Yield, Bond Pricing Theorems, Factors that Influence Bond Prices, Primary Bond Market, Secondary Bond Market, Bonds in Nepal.
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall.
Risk And Return Relationship PowerPoint Presentation SlidesSlideTeam
While building a diversified portfolio it is important to balance risk and returns, plan your investment strategy with our content ready easy to understand Risk and Return Relationship PowerPoint Presentation Slides. The visually appealing portfolio risk-return trade-off PowerPoint compete deck includes a set of pre-made PPT slides such as risk and return of stock bonds, and T-bills, investment strategies of predefined portfolios, risk and return of portfolio manager, measuring stock volatility proportionate, portfolio return analysis, calculating asset beta, portfolio value at risk, ranking the passive income streams impact and many more. Discuss the relationship between risk and return using security analysis and portfolio management PPT visuals. Utilize the professionally designed risk-return trade-off to structure your financial presentation. Furthermore, risk and return equation PPT visuals are completely customizable. You can add or delete the content if needed. Download this easy to use security analysis and portfolio management presentation deck to illustrate the risk-return relationship. Halt the growth of cultural differences with our Risk And Return Relationship PowerPoint Presentation Slides. Focus on bringing about acceptance.
Interest rate risk management for banks under Basel II, presentation by Christine Brown, Department of Finance , The University of Melbourne, Shanghai, December 8-12, 2008
This presentation covers the basics of Dividend Discount Model (DDM). Firstly, fundamental formula for valuing a stock using DDM is discussed. After that, 3 cases i.e DDM for zero growth, constant growth, and variable growth stocks, are discussed.
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
STOCKS, SHARES, EQUITY SHARES, PREFERENCE SHARES, BONDS, DEBENTURES, STOCK VALUATION, FEATURES OF COMMON STOCK, DETERMINING COMMON STOCK VALUES, EFFECTIVE MARKETS, etc.
Risk And Return Relationship PowerPoint Presentation SlidesSlideTeam
While building a diversified portfolio it is important to balance risk and returns, plan your investment strategy with our content ready easy to understand Risk and Return Relationship PowerPoint Presentation Slides. The visually appealing portfolio risk-return trade-off PowerPoint compete deck includes a set of pre-made PPT slides such as risk and return of stock bonds, and T-bills, investment strategies of predefined portfolios, risk and return of portfolio manager, measuring stock volatility proportionate, portfolio return analysis, calculating asset beta, portfolio value at risk, ranking the passive income streams impact and many more. Discuss the relationship between risk and return using security analysis and portfolio management PPT visuals. Utilize the professionally designed risk-return trade-off to structure your financial presentation. Furthermore, risk and return equation PPT visuals are completely customizable. You can add or delete the content if needed. Download this easy to use security analysis and portfolio management presentation deck to illustrate the risk-return relationship. Halt the growth of cultural differences with our Risk And Return Relationship PowerPoint Presentation Slides. Focus on bringing about acceptance.
Interest rate risk management for banks under Basel II, presentation by Christine Brown, Department of Finance , The University of Melbourne, Shanghai, December 8-12, 2008
This presentation covers the basics of Dividend Discount Model (DDM). Firstly, fundamental formula for valuing a stock using DDM is discussed. After that, 3 cases i.e DDM for zero growth, constant growth, and variable growth stocks, are discussed.
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
STOCKS, SHARES, EQUITY SHARES, PREFERENCE SHARES, BONDS, DEBENTURES, STOCK VALUATION, FEATURES OF COMMON STOCK, DETERMINING COMMON STOCK VALUES, EFFECTIVE MARKETS, etc.
1Valuation ConceptsThe valuation of a financial asset is b.docxeugeniadean34240
1
Valuation Concepts
The valuation of a financial asset is based on determining the present value of future cash flows. Thus we need to know the value of future cash flows and the discount rate to be applied to the future cash flows to determine the current value.
The market-determined required rate of return, which is the discount rate, depends on the market’s perceived level of risk associated with the individual security. Also important is the idea that required rates of return are competitively determined among the many companies seeking financial capital. For example ExxonMobil, due to its low financial risk, relatively high return, and strong market position, is likely to raise debt capital at a significantly lower cost than can United Airlines, a financially troubled firm. This implies that investors are willing to accept low return for low risk, and vice versa. The market allocates capital to companies based on risk, efficiency, and expected returns—which are based to a large degree on past performance. The reward to the financial manager for efficient use of capital in the past is a lower required return for investors than that of competing companies that did not manage their financial resources as well.
Throughout this course, we apply concepts of valuation to corporate bonds, preferred stock, and common stock. For that purpose we have to be aware of the basic characteristics of each form of security as part of the valuation process. We have to consider the following:
· The valuation of a financial asset is based on the present value of future cash flows.
· The required rate of return in valuing an asset is based on the risk involved.
· Bond valuation is based on the process of determining the present value of interest payments plus the present value of the principal payment at maturity.
· Preferred stock valuation is based on the dividend paid.
· Stock valuation is based on determining the present value of the future benefits of equity ownership.
List of terms:
required rate of return
That rate of return that investors demand from an investment to compensate them for the amount of risk involved.
yield to maturity
The required rate of return on a bond issue. It is the discount rate used in present-valuing future interest payments and the principal payment at maturity. The term is used interchangeably with market rate of interest.
real rate of return
The rate of return that an investor demands for giving up the current use of his or her funds on a noninflation-adjusted basis. It is payment for forgoing current consumption. Historically, the real rate of return demanded by investors has been of the magnitude of 2 to 3 percent.
inflation premium
A premium to compensate the investor for the eroding effect of inflation on the value of the dollar.
risk-free rate of return
Rate of return on an asset that carries no risk. U.S. Treasury bills are often used to represent this measure, although longer-term government securities have al.
09 Chapter modelChapter 9. Stocks and Their Valuation (Models)Thi.docxhoney725342
09 Chapter modelChapter 9. Stocks and Their Valuation (Models)This model is similar to the bond valuation models developed in Chapter 7 in that we employ discounted cash flow analysis to find the value of a firm's stock.THE DISCOUNTED DIVIDEND MODEL (Section 9-4)The value of any financial asset is equal to the present value of future cash flows provided by the asset. Stocks can be evaluated in two ways: (1) by finding the present value of the expected future dividends, or (2) by finding the present value of the firm's expected future free cash flows, subtracting the market value of the debt and preferred stock to find the total value of the common equity, and then dividing that total value by the number of shares outstanding to find the value per share. Both approaches are examined in this spreadsheet.When an investor buys a share of stock, he/she typically expects to receive cash in the form of dividends and then, eventually, to sell the stock and to receive cash from the sale. Moreover, the price any investor receives is dependent upon the dividends the next investor expects to earn, and so on for different generations of investors. The basic dividend valuation equation is:P0 =D1+D2+. . . .Dn( 1 + rs )( 1 + rs ) 2( 1 + rs ) nThe dividend stream theoretically extends on out forever, i.e., n = infinity. It would not be feasible to deal with an infinite stream of dividends, but if dividends are expected to grow at a constant rate, we can use the constant growth equation as developed in the text to find the value.CONSTANT GROWTH STOCKS (Section 9-5)In the constant growth model, we assume that the dividend will grow forever at a constant growth rate. This is a very strong assumption, but for stable, mature firms, it can be reasonable to assume that the firm will experience some ups and downs throughout its life but those ups and downs balance each other out and result in a long-term constant rate. In addition, we assume that the required return for the stock is a constant. With these assumptions, the price equation for a common stock simplifies to the following expression:P 0 =D 1( r s − g )The long-run growth rate (g) is especially difficult to measure, but one approximates this rate by multiplying the firm's return on equity by the fraction of earnings retained, ROE x
(1 – Payout ratio). Generally speaking, the long-run growth rate is likely to fall between 5% and 8%.EXAMPLEAllied Food Products just paid a dividend of $1.15, and the dividend is expected to grow at a constant rate of 8.3%. What stock price is consistent with these numbers, assuming a 13.7% required return?D0$2.15g8.3%rs13.7%P0 =D1=D0 (1+g)=$2.33( rs − g )( rs − g )0.054P0 =$43.12STOCK PRICE SENSITIVITYOne of the keys to understanding stock valuation is knowing how various factors affect the stock price. We construct below a series of data tables and a graph to show how the stock price is affected by changes in the dividend, the growth rate, and rs. R ...
1. Valuation of Bonds and Shares Topic 04 GSB711 – Managerial Finance Readings: Chapter: Valuing Bonds (Pages 154 - 179) Questions: 1, 4, 7 and Problems: 10, 14, 18, 19, 21 and 24. Chapter: Valuing Stocks (Pages 180 - 218) Questions: 1, 3, 6 and Problems: 12, 17, 19, 24, 27 and 30.
2. Topics Covered…. Valuation of Bonds The Bond Market Interest Rates and Bond Prices Current Yield and Yield to Maturity Bond Rates and Returns The Yield Curve Corporate Bonds and the Risk of Default
3. Topics Covered Valuation of Shares Stocks and the Stock Market Market Values, Book Values, and Liquidation Values Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income Stocks There Are No Free Lunches on Wall Street Market Anomalies and Behavioral Finance
4. Terminology Bond - Security that obligates the issuer to make specified payments to the bondholder. Coupon - The interest payments made to the bondholder. Face Value(Par Value or Principal Value) - Payment at the maturity of the bond. Please assume $1000 as Face Value unless otherwise stated. Coupon Rate - Annual interest payment, as a percentage of face value. Bonds
5. Bonds WARNING The coupon rate IS NOT the discount rate used in the Present Value calculations. The coupon rate merely tells us what cash flow the bond will produce. Coupon payments are interest payments that we receive periodically when we invest in a bond. Since the coupon rate is listed as a %, this misconception is quite common.
6. Bond Pricing The price of a bond is the Present Value of all cash flows generated by the bond (i.e. coupons and face value) discounted at the required rate of return.
8. Bond Pricing Example What is the price of a 5.0 % annual coupon bond, with a $1,000 face value, which matures in 3 years? Assume a required return of 2.15%.
9. Bond Pricing Example (continued) Q: How did the calculation change, given semi-annual coupons versus annual coupon payments?
10. Bond Pricing Example (continued) What is the price of the bond if the required rate of return is 2.15% AND the coupons are paid semi-annually?
11. Bond Pricing Example (continued) What is the price of the bond if the required rate of return is 5.0 %?
12. Bond Pricing Example (continued) What is the price of the bond if the required rate of return is 8 %?
13. Bond Pricing Example (continued) Q: How did the calculation change, given semi-annual coupons versus annual coupon payments? Discount Rate Since the time periods are now half years, the discount rate is also changed from the annual rate to the half year rate. Time Periods Paying coupons twice a year, instead of once doubles the total number of cash flows to be discounted in the PV formula.
14. Interest Rate Risk The value of the 5% bond falls as interest rates rise
15. Interest Rate Risk When the interest rate equals the 5.0% coupon rate, both bonds sell at face value 30 yr bond 3 yr bond
16. Current Yield - Annual coupon payments divided by bond price. Yield To Maturity - Interest rate for which the present value of the bond’s payments equal the price. Bond Yields
17. Bond Yields Calculating Yield to Maturity (YTM=r) If you are given the price of a bond (PV) and the coupon rate, the yield to maturity can be found by solving for r.
18. Bond Yields Example What is the YTM of a 5.0 % annual coupon bond, with a $1,000 face value, which matures in 3 years? The market price of the bond is $1,081.95. YTM = 2.15%
19. Bond Yields WARNING Calculating YTM by hand can be very tedious. It is highly recommended that you learn to use the “IRR” or “YTM” or “i” functions on a financial calculator.
20. Bond Yields Rate of Return - Earnings per period per dollar invested.
24. The Yield Curve Term Structure of Interest Rates - A listing of bond maturity dates and the interest rates that correspond with each date. Yield Curve - Graph of the term structure.
25. The Yield Curve Treasury strips are bonds that make a single payment. The yields on Treasury strips in February 2008 show that investors received a higher yield on longer term bonds.
31. Primary Market - Market for the sale of new securities by corporations. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a firm that has already been through an IPO Stocks & Stock Market
32. Stocks & Stock Market Common Stock - Ownership shares in a publicly held corporation. Secondary Market - Market in which previously issued securities are traded among investors. Dividend - Periodic cash distribution from the firm to the shareholders. P/E Ratio - Price per share divided by earnings per share.
33. Stocks & Stock Market The difference between a firm’s actual market value and its’ liquidation or book value is attributable to its “going concern value.” Factors of “Going Concern Value” Extra earning power Intangible assets Value of future investments
34. Stocks & Stock Market Book Value - Net worth of the firm according to the balance sheet. Liquidation Value - Net proceeds that could be realized by selling the firm’s assets and paying off its creditors. Market Value Balance Sheet - Financial statement that uses market value of all assets and liabilities.
35. Valuing Common Stocks Stock Valuation Methods Valuation by comparables Ratios Multiples Price and Intrinsic Value Dividend Discount Model
36. Valuing Common Stocks 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).
37. Valuing Common Stocks The formula can be broken into two parts. Dividend Yield + Capital Appreciation
38. Valuing Common Stocks Dividend Discount Model - Computation of today’s stock price which states that share value equals the present value of all expected future dividends. H - Time horizon for your investment.
39. Valuing Common Stocks Example 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?
40. Valuing Common Stocks Example 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?
42. Valuing Common Stocks If we forecast no growth, and plan to hold out stock indefinitely, we will then value the stock as a PERPETUITY. Assumes all earnings are paid to shareholders.
43. Valuing Common Stocks Given any combination of variables in the equation, you can solve for the unknown variable. Constant Growth DDM - A version of the dividend growth model in which dividends grow at a constant rate (Gordon Growth Model).
44. Valuing Common Stocks Example 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.
45. Valuing Common Stocks Example- continued If the same stock is selling for $100 in the stock market, what might the market be assuming about the growth in dividends? Answer The market is assuming the dividend will grow at 9% per year, indefinitely.
47. Valuing Common Stocks If a firm elects to pay a lower dividend, and reinvest the funds, the stock price may increase because future dividends may be higher. Payout Ratio - Fraction of earnings paid out as dividends Plowback Ratio - Fraction of earnings retained by the firm Sustainable Growth Rate - Steady rate at which firm can grow; return on equity x plowback ratio
48. Valuing Common Stocks Growth can be derived from applying the return on equity to the percentage of earnings plowed back into operations. g = return on equity X plowback ratio
49. Example Our company forecasts to pay a $5.00 dividend next year, which represents 100% of its earnings. This will provide investors with a 12% expected return. Instead, we decide to plowback 40% of the earnings at the firm’s current return on equity of 20%. What is the value of the stock before and after the plowback decision? Valuing Common Stocks
50. Valuing Common Stocks Example Our company forecasts to pay a $5.00 dividend next year, which represents 100% of its earnings. This will provide investors with a 12% expected return. Instead, we decide to plowback 40% of the earnings at the firm’s current return on equity of 20%. What is the value of the stock before and after the plowback decision? No Growth With Growth
51. Valuing Common Stocks Example - continued If the company did not plowback some earnings, the stock price would remain at $41.67. With the plowback, the price rose to $75.00. The difference between these two numbers (75.00-41.67=33.33) is called the Present Value of Growth Opportunities (PVGO). Present Value of Growth Opportunities (PVGO). Net present value of a firm’s future investments.
