1.11 Stud%20Week%205%20Lect%202%20Stock%20Valuation%20Pt%202%20rev

1.11 Stud%20Week%205%20Lect%202%20Stock%20Valuation%20Pt%202%20rev

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Stock Valuation – part 2 Week 5 Lecture 2

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Basic Valuation From the time value of money we realize that the  value of anything is based on the present value  of the cash flows the asset is expected to  produce in the future
The value of financial assets n n 2 2 1 1 r) (1 CF     ...     r) (1 CF     r) (1 CF     Value + + + + + + = 0 1 2 n r% CF 1 CF n CF 2 Value ... CF t  = the cash flow expected to be generated by  the asset in period t

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Recall:  Expected Return What an investor who buys a stock  expects  to  earn. The formula can be broken into two parts. Expected Dividend Yield  +  Expected Capital Gain  1 0 1 0 0 ˆ ˆ ˆ Expected Return P P D r P P - = = +
Recall: Valuing Common Stocks And, with some algebra P Div r g 0 1 = - 1 s 0 ˆ D ˆ r g P Dividend yield Capital gain = + = + Given any 3 of the  variables, you can  solve for the fourth

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Valuing Common Stocks:  example  1 Example What is the value of a stock that is expected to pay a  \$3.00 dividend next year, and then increase the dividend  at a rate of 8% per year, indefinitely? Assume a 12%  expected return.
Note: same as previous discounting of dividends . Valuing Common Stocks –  Example Current forecasts are for XYZ Company to pay dividends of \$3, \$3.24, and  \$3.50 over the next three years, respectively.  At the end of three years you  anticipate selling your stock at a market price of \$94.48. What is the price of  the stock given a 12% expected return? Why?

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Valuing Common Stocks Example- continued If the same stock is selling for \$100 in the stock market,  what might the market be assuming about the growth in  dividends? Answer The market is assuming the dividend will grow at ___% per year, indefinitely.
Stock Valuation Models Terms:   Growth Rate g the expected rate of change in dividends per share g = Return x plowback =

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Valuing Common Stocks Example Our company forecasts to pay a \$5.00 dividend next year, which represents
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