ch08 - CHAPTER8 StocksandTheirValuation...

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    8-1 CHAPTER 8 Stocks and Their Valuation Features of common stock Determining common stock values Efficient markets Preferred stock
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    8-2 Facts about common stock Represents ownership Ownership implies control Stockholders elect directors Directors elect management Management’s goal: Maximize the  stock price
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    8-3 Social/Ethical Question Should management be equally concerned  about employees, customers, suppliers,  and “the public,” or just the stockholders? In an enterprise economy, management  should work for stockholders subject to  constraints (environmental, fair hiring, etc.)  and competition.
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    8-4 Types of stock market  transactions Secondary market Primary market Initial public offering market (“going  public”)
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    8-5 Different approaches for valuing  common stock Dividend growth model Corporate value model Using the multiples of comparable  firms
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    8-6 Dividend growth model Value of a stock is the present value of the  future dividends expected to be generated by  the stock. + + + + + + + + = ) k (1 D     ...     ) k (1 D     ) k (1 D     ) k (1 D     P s 3 s 3 2 s 2 1 s 1 0 ^
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    8-7 Constant growth stock A stock whose dividends are expected to  grow forever at a constant rate, g. D 1  = D 0  (1+g) 1 D 2  = D 0  (1+g) 2 D t  = D 0  (1+g) t   If g is constant, the dividend growth formula  converges to: g   - k D     g   - k g) (1 D     P s 1 s 0 0 ^ = + =
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    8-8 Future dividends and their  present values t 0 t   )   g     1   (   D D + = t t t )   k     1   ( D PVD + = t 0 PVD P = $ 0.25 Years (t) 0
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    8-9 What happens if g > k s ? If g > k s , the constant growth formula  leads to a negative stock price, which  does not make sense. The constant growth model can only be  used if: k s  > g g is expected to be constant forever
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    8-10 If k RF  = 7%, k M  = 12%, and  β  = 1.2, what  is the required rate of return on the firm’s  stock? Use the SML to calculate the required  rate of return (k s ): k s = k RF  + (k M  – k RF ) β = 7% + (12% - 7%)1.2 = 13%
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    8-11 If D 0  = $2 and g is a constant 6%, find  the expected dividend stream for the  next 3 years, and their PVs. 1.8761 1.7599 D 0 = 2.00 1.6509 k s = 13% g = 6% 0 1 2.247 2 2.382 3 2.12
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  8-12 What is the stock’s market value? Using the constant growth model:
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ch08 - CHAPTER8 StocksandTheirValuation...

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