chap9 - CHAPTER 9 Stocks and Their Valuation TOPICS COVERED...

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CHAPTER 9 Stocks and Their Valuation
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TOPICS COVERED Common and Preferred Stock Properties Valuing Preferred Stocks Valuing Common Stocks - the Dividend Growth Model No growth Constant growth Non-constant or supernormal growth Valuing the Entire Corporation – Free Cash Flow Approach Stock Market Equilibrium 2
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FACTS ABOUT COMMON STOCK Represents ownership Ownership implies control Stockholders elect directors Directors elect management Management’s goal: Maximize the stock price 3
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PREFERRED STOCK CHARACTERISTICS Unlike common stock, no ownership interest Second to debt holders on claim on company’s assets in the event of bankruptcy. Annual dividend yield as a percentage of par value Preferred dividends must be paid before common dividends If cumulative preferred, all missed past dividends must be paid before common dividends can be paid. 4
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INTRINSIC VALUE AND STOCK PRICE Outside investors, corporate insiders, and analysts use a variety of approaches to estimate a stock’s intrinsic value (P 0 ). In equilibrium we assume that a stock’s price equals its intrinsic value. Outsiders estimate intrinsic value to help determine which stocks are attractive to buy and/or sell. Stocks with a price below (above) its intrinsic value are undervalued ( overvalued ). 5
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PREFERRED STOCK VALUATION Promises to pay the same dividend year after year forever, never matures. A perpetuity. V P = D P /r P Expected Return: r P = D P /P 0 6
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PREFERRED STOCK EXAMPLE GM preferred stock has a $25 par value with a 8% dividend yield. What price would you pay if your required return is 7%? 7
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WHAT DO INVESTORS IN COMMON STOCK WANT? Periodic cash flows: dividends, and… To sell the stock in the future at a higher price Management to maximize their wealth 8
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STOCK VALUATION: DIVIDEND GROWTH MODEL Stock Value = PV of Future Expected Dividends ( 29 ( 29 ( 29 ( 29 + + + + + + + + = r D r D r D r D P 1 . . . 1 1 1 3 3 2 2 1 1 0 9
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PATTERNS For Valuation: we will assume stocks fall into one of the following dividend growth patterns. Constant growth rate in dividends
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chap9 - CHAPTER 9 Stocks and Their Valuation TOPICS COVERED...

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