5-3b[1].- Stock Valuation

5-3b[1].- Stock Valuation - Stock Valuation Ramesh Rao 1...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Ramesh Rao 1 Stock Valuation
Background image of page 1

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

View Full DocumentRight Arrow Icon
Ramesh Rao 2 Chapter Organization A. Preliminaries B. Basics of Stock Valuation B1. Valuation in a Single-Period world B2. Multi-period with constant dividends B3. Growth B4. Estimating Growth Rates B5. A Differential Growth Example A. Understanding Growth and Growth Options (PVGO): Leland Cement Company B. Other Price Ratio Analysis E. Stock Market Reporting
Background image of page 2
Ramesh Rao 3 A. Preliminaries Book value, Liquidation value, Market value What is the market value of an asset? Then, what is the market value of a stock? What are the difficulties? How do we deal with them?
Background image of page 3

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

View Full DocumentRight Arrow Icon
Ramesh Rao 4 B1. Valuation in a Single- Period world r P Div P + + = 1 1 1 0 Div 1 +P 1 P o 0 0 1 0 1 P P P P Div r - + = Key Ideas? (Income v. growth) High dividend paying stocks are called “income” stocks High capital gain stocks are called “growth” stocks What do you not like about this?
Background image of page 4
Ramesh Rao 5 B2. Multi-period with constant dividends Div Div Div Div = = = = 2 1 r Div P = 0 Value of a share of stock with constant dividends is calculated as a level perpetuity. Thus, if a your family business pays $3/yr in dividends, its stock will sell for today for $20 if the discount rate is 15% What do you not like about this?
Background image of page 5

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

View Full DocumentRight Arrow Icon
Ramesh Rao 6 B3. Growth We often assume that a firm’s dividends grow at a constant rate. Regular growth rates are often stated as managerial goals. They are a good approximation in many cases. This assumption allows stock to be valued as a growing perpetuity.
Background image of page 6
Ramesh Rao 7 Constant Dividend Growth (Gordon Model) g = Growth rate of cash flows--dividends Assume that g is constant over stated horizon ( 29 ( 29 ( 29 ( 29 ( 29 + + + + + + + + + = r g Div r g Div r g Div P 1 1 1 1 1 1 0 2 2 0 0 0 ( 29 t t g Div Div + = 1 0 ( 29 g r Div g r g Div P - = - + = 1 0 0 1 How did this happen !!? Critical Assumptions?
Background image of page 7

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

View Full DocumentRight Arrow Icon
Ramesh Rao 8 Constant Dividend Growth Example You have increased productivity in your company and dividends are expected to increase by 5%/year indefinitely, without changing the discount rate (15%). How much is the stock worth now if the current dividend is $3?
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/15/2010 for the course FIN 357 taught by Professor Hadaway during the Fall '06 term at University of Texas.

Page1 / 31

5-3b[1].- Stock Valuation - Stock Valuation Ramesh Rao 1...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online