IFM9 Ch 05 Show

IFM9 Ch 05 Show - CHAPTER 5 Basic Stock Valuation 1 Topics...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
  1 CHAPTER 5 Basic Stock Valuation
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  2 Topics in Chapter Features of common stock Determining common stock values Efficient markets Preferred stock
Background image of page 2
  3 Common Stock: Owners,  Directors, and Managers Represents ownership. Ownership implies control. Stockholders elect directors. Directors hire management. Since managers are “agents” of  shareholders, their goal should be:   Maximize stock price.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  4 Classified Stock Classified stock has special provisions. Could classify existing stock as  founders’ shares, with voting rights but  dividend restrictions. New shares might be called “Class A”  shares, with voting restrictions but full  dividend rights.
Background image of page 4
  5 Tracking Stock The dividends of tracking stock are tied to a  particular division, rather than the company  as a whole. Investors can separately value the divisions. Its easier to compensate division managers with  the tracking stock. But tracking stock usually has no voting  rights, and the financial disclosure for the  division is not as regulated as for the  company.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  6 Initial Public Offering (IPO) A firm “goes public” through an IPO  when the stock is first offered to the  public. Prior to an IPO, shares are typically  owned by the firm’s managers, key  employees, and, in many situations,  venture capital providers.
Background image of page 6
  7 Seasoned Equity Offering  (SEO) A seasoned equity offering occurs when  a company with public stock issues  additional shares. After an IPO or SEO, the stock trades in  the secondary market, such as the  NYSE or Nasdaq.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  8 Different Approaches for  Valuing Common Stock Dividend growth model Using the multiples of comparable firms Free cash flow method (covered in  Chapter 11)
Background image of page 8
  9 Stock Value = PV of Dividends What is a constant growth stock? One whose dividends are expected to grow forever at a constant rate, g. P 0 = ^ (1+r s ) 1 (1+r s ) 2 (1+r s ) 3 (1+r s ) D 1 D 2 D 3 D + + +…+
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  10 For a constant growth stock: D 1 = D 0 (1+g) 1 D 2 = D 0 (1+g) 2 D t = D 0 (1+g) t If g is constant and less than r s , then: P 0 = ^ D 0 (1+g) r s - g = D 1 r s - g
Background image of page 10
  11 Dividend Growth and PV of  Dividends: P 0  = ∑(PVof D t ) $ 0.25 Years (t) D t = D 0 (1 + g) t PV of D t = D t (1 + r) t If g > r, P 0 = ∞ !
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
12 What happens if g > r s ? P 0 = ^ (1+r s ) 1 (1+r s ) 2 (1+r s ) D 0 (1+g) 1 D 0 (1+g) 2 D 0 (1+r s ) + +…+ (1+g) t (1+r s ) t If g > r If g > r s , then , then P 0 = ∞. ^ > 1, and
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/12/2008 for the course BUS 420 taught by Professor Poindexter during the Spring '08 term at N.C. State.

Page1 / 51

IFM9 Ch 05 Show - CHAPTER 5 Basic Stock Valuation 1 Topics...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online