Ch04 - Chapter 4 Common Stocks Road Map Part A Introduction...

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Chapter 4 Common Stocks Road Map Part A Introduction to finance. Part B Valuation of assets given discount rates. Fixed-Income securities. Stocks. Forward and futures. Options. Part C Determination of discount rates. Part D Introduction to corporate finance. Main Issues Dividend Discount Model (DDM) Modeling Cash Flows EPS and P/E Growth Opportunities and Growth Stocks Discount Rates
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4-2 Common Stocks Chapter 4 Contents 1 Motivating Examples . . . . . . . . . . . . . . . . . . . . . . 4-3 2 Introduction to Stock Markets . . . . . . . . . . . . . . . . . 4-5 3 Dividend Discount Model . . . . . . . . . . . . . . . . . . . 4-7 4 Modeling Cash Flows . . . . . . . . . . . . . . . . . . . . . . 4-11 4.1 DDM with Constant Growth . . . . . . . . . . . . . . . . . . . . 4-11 4.2 DDM with Multiple-Stage Growth . . . . . . . . . . . . . . . . . 4-14 5 EPS AND P/E . . . . . . . . . . . . . . . . . . . . . . . . . 4-15 6 Growth Opportunities and Growth Stocks . . . . . . . . . . . 4-17 7 Discount Rates . . . . . . . . . . . . . . . . . . . . . . . . . 4-21 8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-23 9 Homework . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-24 15.407 Lecture Notes Fall 2003 c Jiang Wang
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Chapter 4 Common Stocks 4-3 1 Motivating Examples Example 1. Valuing Individual Stocks. How much would you be willing to pay for the stocks of Duke Energy and Anheuser Busch, given the following information? A. Duke Energy: Supplies electricity to 1.8 million customers in North and South Carolina and supplies approximately 12% of the natural gas consumed in the US. Has 20,000 employees and 130,683 common stockholders. Source: Value Line. B. Anheuser Busch: The world’s largest brewer, one of the largest theme park operators in the US, the second-largest US manufacturer of aluminum beverage containers. Significant brands: Budweiser, Michelob, and Busch. Has 24,125 employees and 64,120 shareholders. Source: Value Line. Dividend Information Company Name This Year’s Next Year’s 2-yr Avg Forecasted Dividend Dividend Dividend growth Duke Energy 2.20 2.29 4.0% Anheuser Busch 1.04 1.13 8.4% Information on interest rates and risk premia Long-term Interest Rates 6.0% Market Risk Premium 5.0% Adjustments to Market Premium Duke Energy -1.50% Anheuser Busch -0.75% c Jiang Wang Fall 2003 15.407 Lecture Notes
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4-4 Common Stocks Chapter 4 Example 2. Growth Stocks. Texas Western (TW) is expected to earn $1.00 next year. Book value per share is $10.00 now. TW plans an investment program which will increase net book assets by 8% per year. Earnings are expected to grow proportionally. The investment is financed by retained earnings. The discount rate is 10%, which is assumed to be the same as the rate of return on new investments. How much would you be willing to pay for TW if 1. if it expands at 8% forever? 2. if its’s expansion slows down to 4% after year 5? 15.407 Lecture Notes Fall 2003 c Jiang Wang
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Chapter 4 Common Stocks 4-5 2 Introduction to Stock Markets Definition : Common stock represents equity , an ownership posi- tion, in a corporation. Payments to common stock are dividends in two forms: Cash dividend Stock dividend. Contrary to payments to bondholders, payments to common stockholders are uncertain in both magnitude and timing.
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