Download presentation

Presentation is loading. Please wait.

Published byImogen Holland Modified over 5 years ago

1
, Prentice Hall, Inc. Ch. 8: Stock Valuation

2
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.

3
Preferred Stock A hybrid security: it’s like common stock - no fixed maturity.

4
Preferred Stock A hybrid security: it’s like common stock - no fixed maturity. –technically, it’s part of equity capital.

5
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.

6
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.

7
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

8
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

9
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

10
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

11
Preferred Stock Valuation A preferred stock can usually be valued like a perpetuity:

12
Preferred Stock Valuation A preferred stock can usually be valued like a perpetuity: V = D k ps

13
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%.

14
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 = 4.125.095.095 =

15
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 = 4.125.095.095 = $43.42

16
Expected Rate of Return on Preferred Just adjust the valuation model:

17
Expected Rate of Return on Preferred Just adjust the valuation model: DPoDPo k ps =

18
Example If we know the preferred stock price is $40, and the preferred dividend is $4.125, the expected return is:

19
Example If we know the preferred stock price is $40, and the preferred dividend is $4.125, the expected return is: DPoDPo k ps = = = 4.125 40

20
Example If we know the preferred stock price is $40, and the preferred dividend is $4.125, the expected return is: DPoDPo k ps = = =.1031 4.125 40

21
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%.

22
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.

23
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.

24
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)

25
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

26
Common Stock Valuation (Single Holding Period) Solution: Vcs = (5.50/1.15) + (120/1.15) = 4.783 + 104.348 = $109.13

27
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

28
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

29
Common Stock Valuation (Multiple Holding Periods) Constant Growth Model Assumes common stock dividends will grow at a constant rate into the future.

30
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

31
Constant Growth Model Assumes common stock dividends will grow at a constant rate into the future.

32
Constant Growth Model Assumes common stock dividends will grow at a constant rate into the future. V cs = D 1 k cs - g

33
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

34
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%?

35
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

36
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 =

37
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

38
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

39
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

40
Expected Return on Common Stock Just adjust the valuation model

41
Expected Return on Common Stock Just adjust the valuation model V cs = D k cs - g

42
Expected Return on Common Stock Just adjust the valuation model V cs = D k cs - g k = ( ) + g D 1 V cs

43
Expected Return on Common Stock Just adjust the valuation model V cs = D k cs - g k = ( ) + g D1PoD1Po

44
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%.

45
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 D1PoD1Po

46
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 D1PoD1Po k cs = ( ) +.05 = 3.00 27

47
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 D1PoD1Po k cs = ( ) +.05 = 16.11% 3.00 27

Similar presentations

© 2020 SlidePlayer.com Inc.

All rights reserved.

To make this website work, we log user data and share it with processors. To use this website, you must agree to our Privacy Policy, including cookie policy.

Ads by Google