Chapter 8 - Stock Valuation Chapter 7 - Valuation and Characteristics of Bonds Chapter 8 - Stock Valuation

Tujuan Pembelajaran 1 Mahasiswa mampu untuk: Membedakan berbagai jenis obligasi dan menjelaskan beberapa karakteristik obligasi yang populer Menjelaskan definisi nilai untuk berbagai penggunaan Menjelaskan faktor-faktor yang menentukan nilai Menjelaskan proses dasar penilaian aset Menghitung nilai obligasi dan yield to maturity Menjelaskan lima hubungan penting pada penilaian obligasi

Pokok Bahasan 1 Jenis-jenis obligasi Terminologi dan karakterisitik obligasi Definisi nilai Penentu nilai Proses dasar penilaian Penilaian obligasi Yield to maturity Lima hubungan penting pada penilaian obligasi

Tujuan Pembelajaran 2 Mahasiswa mampu untuk: Menguraikan karakterisitik dan ciri saham preferen Menghitung nilai saham preferen Menjelaskan karakteristik dan ciri saham biasa Menghitung nilai saham biasa Menghitung tingkat imbal hasil yang diharapkan dari saham

Pokok Bahasan 2 Jenis dan ciri saham preferen Me nilai saham preferen Karakteristik saham biasa Menilai saham biasa Menghitung tingkat imbal hasil yang diharapkan pemegang saham

Characteristics of Bonds Bonds pay fixed coupon (interest) payments at fixed intervals (usually every six months) and pay the par value at maturity. 0 1 2 . . . n $I $I $I $I $I $I+$M

Example: AT&T 6 ½ 32 Par value = $1,000 Coupon = 6.5% or par value per year, or $65 per year ($32.50 every six months). Maturity = 28 years (matures in 2032). Issued by AT&T.

Example: AT&T 6 ½ 32 Par value = $1,000 Coupon = 6.5% or par value per year, or $65 per year ($32.50 every six months). Maturity = 28 years (matures in 2032). Issued by AT&T. 0 1 2 … 28 $32.50 $32.50 $32.50 $32.50 $32.50 $32.50+$1000

Types of Bonds Debentures - unsecured bonds. Subordinated debentures - unsecured “junior” debt. Mortgage bonds - secured bonds. Zeros - bonds that pay only par value at maturity; no coupons. Junk bonds - speculative or below-investment grade bonds; rated BB and below. High-yield bonds.

Types of Bonds Eurobonds - bonds denominated in one currency and sold in another country. (Borrowing overseas.) example - suppose Disney decides to sell $1,000 bonds in France. These are U.S. denominated bonds trading in a foreign country. Why do this?

Types of Bonds Eurobonds - bonds denominated in one currency and sold in another country. (Borrowing overseas). example - suppose Disney decides to sell $1,000 bonds in France. These are U.S. denominated bonds trading in a foreign country. Why do this? If borrowing rates are lower in France. To avoid SEC regulations.

The Bond Indenture The bond contract between the firm and the trustee representing the bondholders. Lists all of the bond’s features: coupon, par value, maturity, etc. Lists restrictive provisions which are designed to protect bondholders. Describes repayment provisions.

Value Book value: value of an asset as shown on a firm’s balance sheet; historical cost. Liquidation value: amount that could be received if an asset were sold individually. Market value: observed value of an asset in the marketplace; determined by supply and demand. Intrinsic value: economic or fair value of an asset; the present value of the asset’s expected future cash flows.

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. Can the intrinsic value of an asset differ from its market value?

S V = Valuation $Ct (1 + k)t n t = 1 Ct = cash flow to be received at time t. k = the investor’s required rate of return. V = the intrinsic value of the asset.

Bond Valuation Discount the bond’s cash flows at the investor’s required rate of return. The coupon payment stream (an annuity). The par value payment (a single sum).

S Vb = + Bond Valuation $It $M (1 + kb)t (1 + kb)n Vb = $It (PVIFA kb, n) + $M (PVIF kb, n)

Bond Example Suppose our firm decides to issue 20-year bonds with a par value of $1,000 and annual coupon payments. The return on other corporate bonds of similar risk is currently 12%, so we decide to offer a 12% coupon interest rate. What would be a fair price for these bonds?

0 1 2 3 . . . 20 1000 120 120 120 . . . 120 Note: If the coupon rate = discount rate, the bond will sell for par value.

Bond Example Mathematical Solution: PV = PMT (PVIFA k, n ) + FV (PVIF k, n ) PV = 120 (PVIFA .12, 20 ) + 1000 (PVIF .12, 20 ) 1 PV = PMT 1 - (1 + i)n + FV / (1 + i)n i PV = 120 1 - (1.12 )20 + 1000/ (1.12) 20 = $1000 .12

Suppose interest rates fall immediately after we issue the bonds Suppose interest rates fall immediately after we issue the bonds. The required return on bonds of similar risk drops to 10%. What would happen to the bond’s intrinsic value? Note: If the coupon rate > discount rate, the bond will sell for a premium.

Bond Example Mathematical Solution: PV = PMT (PVIFA k, n ) + FV (PVIF k, n ) PV = 120 (PVIFA .10, 20 ) + 1000 (PVIF .10, 20 ) 1 PV = PMT 1 - (1 + i)n + FV / (1 + i)n i PV = 120 1 - (1.10 )20 + 1000/ (1.10) 20 = $1,170.27 .10

Suppose interest rates rise immediately after we issue the bonds Suppose interest rates rise immediately after we issue the bonds. The required return on bonds of similar risk rises to 14%. What would happen to the bond’s intrinsic value? Note: If the coupon rate < discount rate, the bond will sell for a discount.

Bond Example Mathematical Solution: PV = PMT (PVIFA k, n ) + FV (PVIF k, n ) PV = 120 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 ) 1 PV = PMT 1 - (1 + i)n + FV / (1 + i)n i PV = 120 1 - (1.14 )20 + 1000/ (1.14) 20 = $867.54 .14

Suppose coupons are semi-annual Mathematical Solution: PV = PMT (PVIFA k, n ) + FV (PVIF k, n ) PV = 60 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 ) 1 PV = PMT 1 - (1 + i)n + FV / (1 + i)n i PV = 60 1 - (1.07 )40 + 1000 / (1.07) 40 = $866.68 .07 Mathematical Solution: PV = PMT (PVIFA k, n ) + FV (PVIF k, n ) PV = 60 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 ) 1 PV = PMT 1 - (1 + i)n + FV / (1 + i)n i PV = 60 1 - (1.07 )40 + 1000 / (1.07) 40 = $866.68 .07

S P0 = + Yield To Maturity $It $M (1 + kb)t (1 + kb)n The expected rate of return on a bond. The rate of return investors earn on a bond if they hold it to maturity. $It $M (1 + kb)t (1 + kb)n P0 = + n t = 1 S

YTM Example Suppose we paid $898.90 for a $1,000 par 10% coupon bond with 8 years to maturity and semi-annual coupon payments. What is our yield to maturity?

Bond Example Mathematical Solution: PV = PMT (PVIFA k, n ) + FV (PVIF k, n ) 898.90 = 50 (PVIFA k, 16 ) + 1000 (PVIF k, 16 ) 1 PV = PMT 1 - (1 + i)n + FV / (1 + i)n i 898.90 = 50 1 - (1 + i )16 + 1000 / (1 + i) 16 i solve using trial and error

Zero Coupon Bonds No coupon interest payments. The bond holder’s return is determined entirely by the price discount.

Zero Example Suppose you pay $508 for a zero coupon bond that has 10 years left to maturity. What is your yield to maturity?

Zero Example Suppose you pay $508 for a zero coupon bond that has 10 years left to maturity. What is your yield to maturity? 0 10 -$508 $1000

Zero Example 0 10 PV = -508 FV = 1000 Mathematical Solution: PV = FV (PVIF i, n ) 508 = 1000 (PVIF i, 10 ) .508 = (PVIF i, 10 ) [use PVIF table] PV = FV /(1 + i) 10 508 = 1000 /(1 + i)10 1.9685 = (1 + i)10 i = 7%

The Financial Pages: Corporate Bonds Cur Net Yld Vol Close Chg Polaroid 11 1/2 06 19.3 395 59 3/4 ... What is the yield to maturity for this bond? P/YR = 2, N = 10, FV = 1000, PV = $-597.50, PMT = 57.50 Solve: I/YR = 26.48%

The Financial Pages: Corporate Bonds Cur Net Yld Vol Close Chg HewlPkd zr 17 ... 20 51 1/2 +1 What is the yield to maturity for this bond? P/YR = 1, N = 16, FV = 1000, PV = $-515, PMT = 0 Solve: I/YR = 4.24%

The Financial Pages: Treasury Bonds Maturity Ask Rate Mo/Yr Bid Asked Chg Yld 9 Nov 18 139:14 139:20 -34 5.46 What is the yield to maturity for this Treasury bond? (assume 35 half years) P/YR = 2, N = 35, FV = 1000, PMT = 45, PV = - 1,396.25 (139.625% of par) Solve: I/YR = 5.457%

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.

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

Example: V 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 $43.42

Expected Rate of Return on Preferred Just adjust the valuation model: D Po kps =

Example If we know the preferred stock price is $40, and the preferred dividend is $4.125, the expected return is: D Po kps = = = .1031 4.125 40

The Financial Pages: Preferred Stocks 52 weeks Yld Vol Hi Lo Sym Div % PE 100s Close 2788 2506 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%.

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.

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.

Common Stock Valuation (Single Holding Period) 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? 0 1 ? 5.50 + 120

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

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 9496 -343 82 18 CiscoSys … 47 1189057 21 19 2025 -113

Common Stock Valuation (Multiple Holding Periods) Constant Growth Model Assumes common stock dividends will grow at a constant rate into the future. Vcs = D1 kcs - g

Vcs = D1 kcs - g Constant Growth Model Assumes common stock dividends will grow at a constant rate into the future. D1 = the dividend at the end of period 1. kcs = the required return on the common stock. g = the constant, annual dividend growth rate. Vcs = D1 kcs - g

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%? D0 = $5, so D1 = 5 (1.10) = $5.50

Vcs = = = $110 Example D1 5.50 kcs - g .15 - .10 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%? Vcs = = = $110 D1 5.50 kcs - g .15 - .10

Expected Return on Common Stock Just adjust the valuation model Vcs = D kcs - g k = ( ) + g D1 Po

kcs = ( ) + g kcs = ( ) + .05 = 16.11% Example D1 Po 3.00 27 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%. kcs = ( ) + g D1 Po kcs = ( ) + .05 = 16.11% 3.00 27