Lecture04 - FINM2401 Financial Management Share Valuation...

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Unformatted text preview: FINM2401 Financial Management Share Valuation Lecture 4 2 What is a share? Financial asset a claim to a series of cash flows (dividends) against some economic unit (corporation) Limited liability the maximum loss of a shareholder is limited to their share investment A residual claim to part of whats left in the event of liquidation Ownership shareholders own company, and elect board of directors to oversee management 3 Trading Shares Buy Expect shares to rise in value Long position Sell Expect shares to fall in value Short Sell Sell shares not already owned Short position 4 Dividend Payments On announcement an ex-dividenddate is set Shares purchased before the ex-dividend date will receive the dividend Shares purchased on or after the ex-dividend date will not receive the dividend Share price will drop by value of dividend on the ex-dividend date 5 Cash flows are the key Key concept Value of share = present value of future cash flows from equity Cash flows stemming from shares Dividends (d 1 d n ) Price it will be sold for (P n ) ( ) ( ) ( ) ( ) ( ) = + + + + + + + + + + 3 1 2 1 2 3 ... 1 1 1 1 1 n n n n e e e e e d d d d P P r r r r r 6 Valuing debt was easy! ( ) ( )- - + = + + 1 1 1 n p e r n p e r p e r r F V P V A r r The coupon payment is known The market yield can be observed Face value is known Maturity date is known 7 Valuing equity is harder! Future dividends are not known Required rate of return is difficult to observe Future share sale proceeds are not known ( ) ( ) ( ) ( ) ( ) = + + + + + + + + + + 3 1 2 1 2 3 ... 1 1 1 1 1 n n n n e e e e e d d d d P P r r r r r 8 Share Valuation (E) Cash flows stemming from shares Dividends (d 1 ) Share price once sold (P 1 ) + = = + 1 1 1 e d P E P r Todays Price 9 Share Valuation Since future investors will simply value future dividends, the price next year is given by: Which means the price now is:...
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This note was uploaded on 03/13/2010 for the course ECON econ1010 taught by Professor Margretfinch during the Three '08 term at Griffith.

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Lecture04 - FINM2401 Financial Management Share Valuation...

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