CFFM6_ch 09_slides - Chapter 9 Stocks and Their Valuation...

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Stocks and Their Valuation Chapter 9 Features of Common Stock Determining Common Stock Values Preferred Stock 9-1
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Facts about Common Stock Represents ownership Ownership implies control Stockholders elect directors Directors elect management Management’s goal: Maximize the stock price 9-2
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Intrinsic Value and Stock Price Outside investors, corporate insiders, and  analysts use a variety of approaches to  9-3
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Determinants of Intrinsic Value and  Stock Prices 9-4 “True”  Risk “Perceived”  Investor Returns “Perceived”  Risk Managerial Actions, the Economic  Environment, Taxes, and the Political Climate Stock’s  Intrinsic Value Stock’s  Market Price Market Equilibrium: Intrinsic Value = Stock Price
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Different Approaches for Estimating the  Intrinsic Value of a Common Stock Discounted dividend model Corporate valuation model Using the multiples of comparable firms 9-5
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Discounted Dividend Model Value of a stock is the present value of the  future dividends expected to be generated by  the stock. + + + + + + + + = ) r (1 D     ...     ) r (1 D     ) r (1 D     ) r (1 D     P ˆ s 3 s 3 2 s 2 1 s 1 0 9-6
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Constant Growth Stock g r D     g r g) (1 D     P ˆ s 1 s 0 0 - = - + = 9-7 A stock whose dividends are expected to  grow forever at a constant rate, g.
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Future Dividends and Their Present  Values 9-8 t t t )     1   ( D PVD + = t 0 PVD P = $ 0.25 Years (t) 0 t 0 t ) g 1 ( D D + =
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What happens if g > r s ? 9-9
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Use the SML to Calculate the Required  Rate of Return (r s ) 9-10
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Find the Expected Dividend Stream for the  Next 3 Years and Their PVs 9-11 1.8761 1.7599 1.6509 g = 6% 0 1 2.247 2 2.382 3 2.12
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