Chapter08StockValuation

- OEM 2009 Program Common Stock Terminology CHAPTER 8 Voting rights Preemptive rights Classified stock Stocks and Their Valuation Initial public

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
OEM 2009 Program Stocks and Their Valuation Page 1 CHAPTER 8 Stocks and Their Valuation Common Stock: Terminology ± Voting rights ± Preemptive rights ± Classified stock ± Initial public offering (IPO) ± Par value ± Dividends ± Stock splits Control ± Stock represents ownership ± Ownership implies control ± Stockholders elect directors ± Directors hire management ± Management’s goal: Maximize the stock price Common Stock Symbols D t = Expected dividend at period t P 0 = Current price P = Expected price at period t ^ t g = Expected growth rate BR = Sustainable growth rate B = Retention rate = (1 - DPR) R = Return on equity Common Stock Symbols r S = Required rate of return r S = Expected rate of return = Actual rate of return ^ __ r S = Actual rate of return = Expected dividend yield = Expected capital gains yield ^ D 1 P 0 P 1 -P 0 P 0 Stock Valuation ² Assume that you plan to buy a share of stock today. You expect to hold this stock for 1 year, receive a dividend payment at the end of the year, then immediately sell the stock in the market. How much should you pay for the stock today?
Background image of page 1

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

View Full DocumentRight Arrow Icon
OEM 2009 Program Stocks and Their Valuation Page 2 Stock Valuation P 0 = [D 1 + P 1 ] But what is the value of P 1 1+r S 1 ^ ^ ________ But, what is the value of P 1 P 1 = [D 2 + P 2 ] 1 1+r S 1 ^ ^ ________ Stock Valuation P 0 = [D 1 ] + [D 2 + P 2 ] 1 1+r S 1 1 1+r S 2 ^ ________ ________ P 0 = [D 1 ] + [D 2 ] + . .. + [D + P ] 1 1+r S 1 1 1+r S 2 1 1+r S ^ ________ ________ ________ Stock Valuation 0 1 2 P 0 =D 1 D 2 D r S Assume present value of P will be zero: P 0 = + + … + D 1 D 2 D (1+r S ) 1 (1+r S ) 2 (1+r S ) Stock Valuation ± Our only problem now is to determine the dividend in each period and the correct discount rate (investor’s required rate of return) to use. Discount Rate ± Assume that this stock has a beta of 1.25, the risk-free rate is 5%, and the expected return on the market is 13%. We can use the CAPM to then determine r S as follows: r S = .05 + [.13 -.05][1.25] = 15% Dividends ± Assume that the firm just paid a dividend of $1.50 (you won’t get this). Future dividends will depend on growth rate assumptions: z Zero (or no) growth z Constant growth z Non-constant growth (followed by constant growth)
Background image of page 2
OEM 2009 Program Stocks and Their Valuation Page 3 Zero Growth P 0 = Σ [D t ] t =1 1 (1+r S ) t __________ Assume D t = D for all t, since g = 0 P 0 = [D] Σ = D r S 1 (1+r S ) t t =1 ___________ Zero Growth At a zero growth rate, the dividend
Background image of page 3

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

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/12/2010 for the course FIN 5405 taught by Professor Tapley during the Summer '08 term at University of Florida.

Page1 / 9

- OEM 2009 Program Common Stock Terminology CHAPTER 8 Voting rights Preemptive rights Classified stock Stocks and Their Valuation Initial public

This preview shows document pages 1 - 4. Sign up to view the full document.

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