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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