chapter 9 notes

chapter 9 notes - Most appropriate for mature companies...

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1 NCSU BUS 320 Chapter 9 Notes
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2 Legal rights & Privileges of Common Stockholders Control of the Firm Right to elect directors who in turn elect the officers. Preemptive Right Gives common stockholders the right to purchase on a pro rata basis new issues of common stock. Prevents management from purchasing shares itself, thus diluting current shareholders positions.
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3 Common Stock Valuation Two features of common stocks Owners are entitled to dividends if paid by company Stock will be hopefully sold at higher price at later date. Expected Dividends as basis for Stock Values Dividends provide cash flows from common stock
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4 Dividend Discount Model Constant Growth Stocks P o = D 1 r s – g Where D 1 is the expected dividend 1 year out. r s is the required rate of return on the stock as calculated by CAPM g is the growth rate of the dividends g = ROE x Retention Rate
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5 Common Growth Stocks (con.) Growth in dividends occur primarily as a result of growth in earnings per share.
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Unformatted text preview: Most appropriate for mature companies with stable history of growth and stable future expectations. Does not work if 1 . Company pays no dividends 2 . If g is larger than r s 6 Zero Growth Stock Example would be a preferred stock with the dividend is set and does not change. p o = D r s Where D is the current dividend 7 Valuing the Entire Corporation Used when future dividends are not easily predictable. Where no history of dividends exist Calculates firms expected free cash flows and then finds their present value. FCF = [ EBIT (1-t) + Depreciation & Amortization]- [Capital Expenditures + Change in Net Operating Working Capital] 8 Steps to Calculate Calculate Expected End of Year Free Cash Flow (FCF) Calculate Present Value (PV) of FCF FCF WACC- g Where WACC is the firms weighted average cost of capital Subtract Market Value of Debt & Preferred Stock Divide by Shares Outstanding...
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chapter 9 notes - Most appropriate for mature companies...

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