BCOR 2200 Chapter 7 - Chapter 7 Equity Markets Stock...

Info icon This preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Chapter 7 Equity Markets & Stock Valuation
Image of page 1

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

View Full Document Right Arrow Icon
2 Outline: Common Stock Valuation Features of Common and Preferred Stocks The Stock Markets Concepts and Skills: Understand how stock prices depend on future dividends and dividend growth Be able to compute stock prices using the dividend growth model Understand how corporate directors are elected Understand how stock markets work Understand how stock prices are quoted
Image of page 2
3 7.1 Common Stock Valuation Share of Ownership Entitles you to: 1. Share of Profits 2. Share of Assets If the company is liquidated After creditors (including bond holders) get their money 3. Share of vote for Board of Directors A Share is worth the PV all future cash flows: 1. Profits paid to share holders – Cash Dividends 2. Cash received from the sale of the stock Sold to another investor Sold back to the company
Image of page 3

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

View Full Document Right Arrow Icon
4 Example: Hold for 1 year A share of stock will pay a $2 dividend in one year It will be worth $14 in one year You require a 20% return on investments with this risk Calculate the most you are willing to pay P 0 = Price at time 0 D 1 = Dividend at time 1 P 1 = Price at time 1 ( 29 ( 29 33 . 13 $ 0 2 . 1 14 $ 2 $ R 1 P D P 1 1 1 1 0 = + = + + =
Image of page 4
5 Example: Hold for 2 years Div at time 2 = $2.10 D 1 = $2 and D 2 = $2.10 Price at time 2 = P 2 = $14.70 Still require a 20% return Cash flow diagram: ( 29 ( 29 ( 29 ( 29 33 . 13 $ 0 2 . 1 70 . 14 $ 10 . 2 $ 0 2 . 1 2 $ R 1 P D R 1 D P 2 1 2 2 2 1 1 0 = + + = + + + + = P 0 $14.70 0 1 2 $2.00 $2.10
Image of page 5

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

View Full Document Right Arrow Icon
Clicker Question: 6
Image of page 6
Clicker Answer: 7
Image of page 7

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

View Full Document Right Arrow Icon
8 General Formula Derivation (Part 1): P 0 is a function of D 1 and P 1 But P 1 is a function of D 2 and P 2 . So Sub for P 1 in P 0 equation: ( 29 R 1 P D P 2 2 1 + + = ( 29 R 1 P D P 1 1 0 + + = ( 29 ( 29 ( 29 ( 29 2 2 2 1 1 0 2 2 1 0 R 1 P D R 1 D P R 1 R 1 P D D P + + + + = Þ + + + + =
Image of page 8
9 General Formula Derivation (Part 2): So now P 0 is a function of D 1 , D 2 and P 2 But P 2 can be written as a function of D 3 and P 3 So Sub for P 2 in P 0 equation and get P 0 as a function D 1 , D 2 , D 3 and P 3 : But P 3 can be written as a function of D 4 and P 4 and so on… ( 29 R 1 P D P 3 3 2 + + = ( 29 ( 29 2 2 2 1 1 0 R 1 P D R 1 D P + + + + = ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 3 3 3 2 2 1 0 2 3 3 2 1 0 R 1 P D R 1 D R 1 D P R 1 R 1 P D D R 1 D P + + + + + + = Þ + + + + + + = ( 29 ( 29 ( 29 ( 29 L + + + + + + + + = 4 4 3 3 2 2 1 0 R 1 D R 1 D R 1 D R 1 D P
Image of page 9

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

View Full Document Right Arrow Icon
10 General Formula Discussion The price at any time (including now) is the present value of all future cash flows (dividends) Its as if we are just pushing back the sale time to include the next dividend. So how can we estimate all future dividend payments? First we’ll make some simple assumptions and look at those cases: Assumption 1: Dividends are the same forever: D 0 = D 1 = D 2 = … Assumption 2: Dividends grow at a constant rate: D 1 = D 0 (1 + g) Assumption 3: Dividends grow fast now, but at a constant rate later ( 29 ( 29 ( 29 ( 29 L + + + + + + + + = 4 4 3 3 2 2 1 0 R 1 D R 1 D R 1 D R 1 D P
Image of page 10
11 Dividends are Constant Forever: D 0 = D 1 = D 2 = D 3 = D (with no subscript) This is just the Present Value of a Perpetuity.
Image of page 11

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

View Full Document Right Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern