Corporate Finance page 9

Corporate Finance page 9 - P r ice of Coupon Bond = PV(Bond...

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- - Price of Coupon Bond = PV (Bond Cash Flows) = CPN/(1+YTM) + CPN/(1+YTM)^2 + … - Coupon-paying yield curves – plot of the yields of coupon bonds at different maturities Chapter 9: - Stocks: Total return = re = (Div1 +P1)/P0 – 1 = (Div1/Po) – (P1-P0)/P0 = Dividend Yield – Capital Gain Rate - Dividend yield is expected annual dividend of the stock divided by its current price. Capital gain is how much the investor will earn on the stock. The expected total return of the stock should equal the expected return of other investments available in the market with equivalent risk - Dividend discount model is Po = SUM from n=1 to infinity (Divn/ (1+re)^n) - Constant dividend growth model = Po = Div1/re-g - Firm’s dividend payout rate is the fraction of earnings that the firm pays as dividends each year Div_t =( Earnings_t/Shares Outstanding_t ) X Dividend Payout Rate_t = EPS_t X Div Payout_t - Therefore, the firm can increase dividends by increasing net income, increasing payout rate, or decreasing shares outstanding - A firm can pay earnings out to investors or it can retain & invest them.
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