2. PUNJAB GROUP OFPUNJAB GROUP OF
COLLEGE:COLLEGE:
ZAMAN IMTIAZ.
0035.
MEMBER`S NAMES
PRESENTED BY:PRESENTED BY:
BY:ZAMAN IMTIAZ
BY:ZAMAN IMTIAZ
3. WORKING CAPITAL:
Investment in Current Assets:
Current Assets, those assets which can be
converted into cash within an accounting
year:
EXAMPLE:
• Cash, Near Cash:
• Debtors, Bills Receivables:
• Inventory:BY:ZAMAN IMTIAZ
7. STOCK:
A stock is a type of security that signifies
ownership in a corporation and represents a
claim on part of the corporation's assets and
earnings.
There are two main types of stock:
TYPE OF STOCK:
COMMON STOCK:
PREFERRED STOCK:
BY:ZAMAN IMTIAZ
8. COMMON STOCK:
“Common stock possesses the traditional
right of ownership voting right,
participation in dividends, and a
residual claim to assets in the event of
liquidation.”
BY:ZAMAN IMTIAZ
9. PREFERRED STOCK:
“Preferred stock generally has a dividend
that must be paid out before dividends to
common stockholders and the shares
usually do not have voting rights is called
preferred stock”.
BY:ZAMAN IMTIAZ
11. FUNCTION:
Preferred stock is designed to
function primarily as a fixed-income
security.
Whereas common stock is usually
considered to be a vehicle for long-
term growth that often does not
deliver a regular income stream.
BY:ZAMAN IMTIAZ
12. VOTING RIGHT:
Common stock holders have a right
of voting on corporate policy.
Due to their preferential treatment
they do not have the voting rights
that come with common stock.
BY:ZAMAN IMTIAZ
13. DIVIDEND:
Common stockholder usually receive
their dividend after preferred
shareholder.
Preferred shareholders also usually
receive their dividends before
anything is paid to common
shareholders.
BY:ZAMAN IMTIAZ
14. Cumulative dividend rights:
Common stock do not have
cumulated dividend rights
The dividend preference carried by
most preferred stocks is a
cumulative one.
BY:ZAMAN IMTIAZ
15. Convertibility:
Common stock is not convertible into
debentures.
The preferred stock may be
convertible into share
BY:ZAMAN IMTIAZ
16. Face value:
The face value of common stock
shares is usually low than preferred
share.
The face value of preferred share is
usually higher.
BY:ZAMAN IMTIAZ
17. Kinds:
The share has one type equity
shares now.
The preferred share have two are
three types.
BY:ZAMAN IMTIAZ
18. Redemption:
The common share not redeemable
during the lifetime.
The preferred share is redeemable
stockholder demand.
BY:ZAMAN IMTIAZ
19. 19
Stock Valuation Methods:
The price-earnings (PE) method assigns the
mean PE ratio based on expected earnings of
all traded competitors to the firm’s expected
earnings for the next year
Assumes future earnings are an important
determinant of a firm’s value
Assumes that the growth in earnings in future years
will be similar to that of the industry
BY:ZAMAN IMTIAZ
20. 20
Stock Valuation Methods (cont’d)
Price-earnings (PE) method (cont’d)
Reasons for different valuations
• Investors may use different forecasts for the firm’s
earnings or the mean industry earnings
• Investors disagree on the proper measure of earnings
Limitations of the PE method
• May result in inaccurate valuation for a firm if errors are
made in forecasting future earnings or in choosing the
industry composite
• Some question whether an investor should trust a PE ratio
BY:ZAMAN IMTIAZ
21. 21
Valuing A Stock Using the PE
Method:
A firm is expected to generate earnings of $2 per
share next year. The mean ratio of share price
to expected earnings of competitors in the
same industry is 14. What is the valuation of
the firm’s shares according to the PE method?
$2814$2
ratio)PEindustry(Meanshare)perfirmofearningsExpected(shareperValuation
=×=
×=
BY:ZAMAN IMTIAZ
22. 22
Stock Valuation Methods (cont’d):
Dividend discount model
John Williams (1931) stated that the price of a stock
should reflect the present value of the stock’s future
dividends:
• D can be revised in response to uncertainty about the
firm’s cash flows
• k can be revised in response to changes in the required
rate of return by investors
∑
∞
= +
=
1 )1(
Price
t
t
t
k
D
k
BY:ZAMAN IMTIAZ
23. Common Stock Valuation:
Unlike bonds, valuing common stock is more
difficult. Why?
1. The timing and amount of future cash flows is not
known.
2. The life of the investment is essentially forever.
3. There is no way to observe the rate of return that
the market requires.
BY:ZAMAN IMTIAZ
24. Common Stock Valuation:
One method to determine the price of a share of
stock is to calculate present value of all future
dividends.
P0 = Σ [Dt/(1 + r)t
]
where t = 1 to ∞
How many future dividends are there? In principle,
there can be an infinite number
BY:ZAMAN IMTIAZ
25. Common Stock Valuation:
To help us value a share of stock, we need to make
some simplifying assumptions about the pattern of
future dividends.
The three cases we consider are:
1. The dividend has a zero growth rate.
2. The dividend grows at a constant rate.
3. The dividend grows at a constant rate after
some length of time.
BY:ZAMAN IMTIAZ
26. 1. Zero Growth Stocks:
A share of common stock in a company with a
constant dividend is much like a share of preferred
stock – D1 = D2 = D3 = … = D
Since the dividend is always the same, the stock can
be viewed as an ordinary perpetuity with a cash flow
equal to D every period.
Thus,
P0 = D/r
BY:ZAMAN IMTIAZ
27. 2. Constant Growth:
Suppose we knew that the dividend for some
company always grows at a steady rate (g).
As long as the growth rate is less than the discount
rate (r), the present value of the series of cash flows
can be written simply using the growing perpetuity
formula:
P0 = D0 x (1 + g) = D1
r – g r – g
where D0 = the most recent dividend paid
D1 = the next dividend to be paid.
BY:ZAMAN IMTIAZ
28. 2. Constant Growth:
We can actually use the dividend growth model to get
the stock price at any point in time, not just today. In
general, the price of the stock as of time t is:
Pt = Dt x (1 + g) = Dt+1
r – g r – g
Note: The model only works when the discount rate
is greater than the growth rate.
BY:ZAMAN IMTIAZ
29. 3. Non-Constant Growth:
At times, a new company may pay no dividends early
in its life but start paying dividends that grow at a
constant rate some time in the future.
At other times, a new company may pay small
dividends initially and, at some point in the future,
start paying dividends that grow at a constant rate.
However, as always, the value of the stock is the
present value of all future dividends.
Many cash flow scenarios are possible in this
situation.
BY:ZAMAN IMTIAZ
30. 3. Non-Constant Growth:
Example:
• ABC Company does not plan to pay a dividend until
year 5. ABC’s expects the dividend in year five to be
$1 and dividends in future years to grow at a constant
rate of 5%. If the firm’s risk-adjusted required rate of
return is 13%, what is the value of a share of stock in
the company today?
P4 = 1/(.13 – .05) = $12.50
P0 = 12.50(1.13)-4
= $7.67
BY:ZAMAN IMTIAZ