1.12 Student%20Week%206%20lect%201%20Stock%20Valuation%20Part%203

# 1.12 Student%20Week%206%20lect%201%20Stock%20Valuation%20Part%203

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Stock Valuation Part 3 Week 6 Lecture 1

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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
Preferred stock Hybrid security. Like bonds, preferred stockholders receive  a fixed dividend that must be paid before  dividends are paid to common  stockholders.   However, companies can omit preferred  dividend payments without fear of pushing  the firm into bankruptcy.

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Preferred Stock Valuation Example   A preferred stock with an annual dividend of \$5  sells for \$50.  What is the preferred stock’s  expected return?
Preferred Stock Valuation Example   A preferred stock with an annual dividend of \$5  has a return of 10%.  What is the price of the  preferred stock?

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Alternative Valuation Methods Corporate value model Firm Multiples method
Corporate value model Also called the free cash flow method.  Suggests  the value of the entire firm equals the present  value of the firm’s free cash flows.

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Corporate value model Free cash flow is the firm’s after-tax operating  income less the net capital investment FCF = NOPAT – Net capital investment FCF = EBIT(1-t) + Depreciation – Capital  Expenditures – Changes in NOWC
Find the market value (MV) of the firm, by  finding the PV of the firm’s future FCFs. Subtract MV of firm’s debt and preferred stock  to get MV of common stock. Divide MV of common stock by the number of

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## This note was uploaded on 12/23/2009 for the course BCOM FINC 201 taught by Professor Debrak.reed during the Spring '09 term at Canterbury.

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1.12 Student%20Week%206%20lect%201%20Stock%20Valuation%20Part%203

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