5-Stock Valuation - N E[CFt Market Value PV t t 1(1 r Cash...

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Cash Flows Discount Rate Bonds Coupons Face Value YTM Stocks Perpetual Dividends R Equity Firms Free Cash Flow R Firm WACC Projects Incremental Free Cash Flow R Project 1 [ ] (1 ) N t t t E CF Market Value PV r
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Dividends are set by the Board of Directors Minimal Par Value Last Priority – Residual Claimant No Maturity Voting Rights Dividend Payments are not tax deductible
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Present Value of Expected Future Cash Flows Dividend payments Share price upon sale 1 (1 ) (1 ) N t N t N t Div Price Price r r
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Future dividend and future price are unknown Risky Cash Flows! Need a discount rate that account for this risk Riskier cash flows – higher discount rate r here has to be the expected return that an investor could get by investing in other assets whose cash flows have the same level of risk (~r e or R Equity )
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You are considering the purchase of a share of stock. You expect dividends to be $2 per year for the next 3 years. You expect to sell the stock for $34 at the end of 3 years. Investments of similar risk earn an expected return of 12% How much are you willing to pay for the stock?
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The purchaser of the stock will be: Another investor who will receive the proceeding dividends The firm repurchasing stock Repurchases are priced such that shareholders are indifferent to receiving the repurchase price and continuing to hold the stock
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