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Unformatted text preview: Click to edit Master subtitle style Chapter 8 © 20032009 Mehmet Yalin Equity Valuation Chapter 8 © 20032009 Mehmet Yalin Chapter 8 ¡ Stock Valuation Chapter 8 22 © 20032009 Mehmet Yalin Chapter 8 © 20032009 Mehmet Yalin the beginnings v Investors receive cash flow from equity when the company pays dividends, they sell off their shares. v Difficulties in equity valuation arise because investment has no maturity, dividends are not known by certainty, required rate of return is unobservable. © 20032009 Mehmet Yalin 33 Chapter 8 Chapter 8 © 20032009 Mehmet Yalin example on equity pricing You want to buy a share of Panthers, Inc . The company is expected to pay a $3 dividend in one year and you expect to sell the stock for $89 at that time. If the required rate of return is 15% for investments of this risk, what is the maximum price you would be willing to pay for a Panthers share today? © 20032009 Mehmet Yalin 44 80 $ 15 . 1 89 $ 3 $ = + + = P R P D P + + = 1 1 1 Chapter 8 Chapter 8 © 20032009 Mehmet Yalin example on equity pricing (cont’d) What if Panthers, Inc. is expected to pay a $3 dividend in one year, $3.35 dividend in two years and you expect to sell the stock for $99 at that time? What if Panthers, Inc. is expected to pay a $3 dividend in one year, $3.35 dividend in two years, $3.85 dividend in three years and you expect to sell the stock for $110 at that time? © 20032009 Mehmet Yalin 55 ( 29 80 $ 15 . 1 99 $ 35 . 3 $ 15 . 1 3 $ 2 = + + + + = P ( 29 2 2 2 1 1 1 R P D R D P + + + + = ( 29 ( 29 80 $ 15 . 1 110 $ 85 . 3 $ 15 . 1 35 . 3 $ 15 . 1 3 $ 3 2 = + + + + + + = P ( 29 ( 29 3 3 3 2 2 1 1 1 1 R P D R D R D P + + + + + + = Chapter 8 Chapter 8 © 20032009 Mehmet Yalin equity pricing using dividends v Price of a stock is the present value of its future dividends. v Following models help to estimate future dividends: Constant dividend model Constant growth dividend model © 20032009 Mehmet Yalin 66 ( 29 ( 29 ( 29 + + + + + + = + + + + = + + + + = + + = 3 3 2 2 1 2 2 2 1 2 2 1 1 1 1 1 1 1 1 1 1 1 R D R D R D R P D R D R R P D D R P D P Chapter 8 Chapter 8...
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This note was uploaded on 10/16/2009 for the course BUSFIN 1030 taught by Professor Zutter during the Fall '08 term at Pittsburgh.
 Fall '08
 ZUTTER

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