BCOR 2200 Chapter 7 w cq

BCOR 2200 Chapter 7 w cq - Chapter 7 Equity Markets & Stock...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Chapter 7 Equity Markets & 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
2 Outline: 1. Common Stock Valuation 2. Features of Common and Preferred Stocks 3. The Stock Markets Concepts and Skills: Stock prices depend on: 1. Future dividends 2. The growth rate of those dividends Compute stock prices using the dividend growth model Understand how corporate directors are elected Understand how stock markets work Understand how stock prices are quoted
Background image of page 2
3 7.1 Common Stock Valuation Share of Ownership Entitles you to: 1. Share of Profits 2. Share of Equity (Equity = Assets – Liabilities) If the company is liquidated (which means the assets are sold) And creditors (including bond holders) get their money What is left (the residual ) goes to the shareholders So shares of stock are sometimes called residual claims 3. Share of vote for Board of Directors Stock is worth the PV the money that received: 1. Dividends paid to shareholders while the stock is held 2. Cash from the sale of the stock
Background image of page 3

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

View Full DocumentRight Arrow Icon
4 Example: A stock is held for 1 year: It will pay a $2 dividend in one year It can be sold for $14 in one year The required return is 20% on investments with this risk Calculate the most you are willing to pay: P 0 = Price at time 0 D 1 = Dividend at time 1 P 1 = Price at time 1 ( 29 ( 29 33 . 13 $ 0 2 . 1 14 $ 2 $ R 1 P D P 1 1 1 1 0 = + = + + =
Background image of page 4
5 Example: Same stock is held for 2 years: Div at time 2 = $2.10 D 1 = $2.00 and D 2 = $2.10 Price at time 2 = P 2 = $14.70 Still require a 20% return Cash flow diagram: ( 29 ( 29 ( 29 ( 29 33 . 13 $ 0 2 . 1 70 . 14 $ 10 . 2 $ 0 2 . 1 2 $ R 1 P D R 1 D P 2 1 2 2 2 1 1 0 = + + = + + + + = P 0 $14.70 0 1 2 $2.00 $2.10
Background image of page 5

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

View Full DocumentRight Arrow Icon
Clicker Question: A share of stock will pay a $1 dividend in one year and a $1.25 dividend in two years. The price of the stock at time 2 will be $25 Calculate the current price of the stock assuming a required return of 10% A. $20.00 B. $21.69 C.$22.60 D.$24.77 E. $27.25 6
Background image of page 6
Clicker Answer: D 1 = $1 D 2 = $1.25 P 2 = $25 R = 10% P 0 = D 1 /(1 + R) + (P 2 + D 2 )/(1 + R) 2 = $1/(1.1) + ($25 + $1.25)/(1.1) 2 = $0.91 + $21.69 = $22.60 The answer is C. 7
Background image of page 7

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

View Full DocumentRight Arrow Icon
8 General Formula For a Stock’s Price: • The price at any time (including now, P 0 ) is the present value of all future cash flows For a stock the CFs are called dividends But if we sell the stock… Then we get the Price at the time it is sold How do we calculate the price at the time of sale? ( 29 ( 29 ( 29 ( 29 + + + + + + + + = 4 4 3 3 2 2 1 0 R 1 D R 1 D R 1 D R 1 D P
Background image of page 8
9 Derivation of General Formula (Part 1): P 0 is a function of D and P But P is a function of D and P . ( 29 R 1 P D P 2 2 1 + + = ( 29 R 1 P D P 1 1 0 + + = ( 29 ( 29 ( 29 ( 29 2 2 2 1 1 0 2 2 1 0 R 1 P D R 1 D P R 1 R 1 P D D P + + + + = + + + + =
Background image of page 9

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

View Full DocumentRight Arrow Icon
10 Derivation of General Formula (Part 2): So now P 0 is a function of D , D and P ( 29 R 1 P D P 3 3 2 + + = ( 29 ( 29 2 2 2 1 1 0 R 1 P D R 1 D P + + + + = ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 3 3 3 2 2 1
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/06/2010 for the course BCOR 2200 at Colorado.

Page1 / 64

BCOR 2200 Chapter 7 w cq - Chapter 7 Equity Markets & Stock...

This preview shows document pages 1 - 11. Sign up to view the full document.

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