20 download_doc-10.php

20 download_doc-10.php - BUS-G 345 I. Preview a. 1990s were...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
BUS-G 345 Chapter 7 I. Preview a. 1990s were an extraordinary decade for stocks b. Early 2000s all indexes hit record highs c. Early 2000 the stock market began to decline II. Computing the price of common stock a. Overview i. Common stock 1. The principal way that corps raise equity capital ii. Stockholders 1. Own an interest in the corp consistent with the percentage of outstanding shares owned 2. Bundle of rights a. Right to vote b. Right to be the residual claimant of all funds flowing into the firm (cash flows) i. Whatever remains after all other claims against the firm’s assets have been satisfied c. Right to sell the stock 3. Paid dividends from the net earnings of the corp a. Payments made periodically b. At levels set by the board of directors usually on the recommendation of management iii. The value of any investment is found by computing the present value of all cash flows iv. Value common stock by the value in today’s dollars of all future cash flows 1. Dividends, sales price, or both
Background image of page 1

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

View Full DocumentRight Arrow Icon
BUS-G 345 Chapter 7 b. The one-period valuation model i. Buy a stock, hold it for one period to get a dividend, then sell the stock ii. Need to determine whether the current price accurately reflects an analyst’s forecast iii. To value a stock today, one must find the present discounted value of the expected cash flows (future payments) iv. Equation 1. v. If price < present value → good investment (buy) 1. Warning: a stock may be selling for less than a present value you calculated because other investors place a different risk on the cash flows or estimate the cash flows to be less than you c. The generalized dividend valuation model i. The value of a stock today is the present value of all future cash flows 1. The only cash flows that an investor will receive are dividends and a final sales price when the stock if finally sold in period n ii. First estimate the value the stock will have at some point in the future 1. Must do this before you can estimate its value today a. Must find P n before you can find P 0 i. If P n is far in the future it will not affect P 0 iii. Equation iv. Implications 1. The price of stock is determined only by the present value of the dividends a. Nothing else matters 2. How do stocks that don’t pay dividends have value a. Buyers of the stock expect that the firm will pay dividends in the future
Background image of page 2
BUS-G 345 Chapter 7 i. Most of the time a firm institutes dividends as soon as it has completed the rapid growth phase of its life cycle 3. Requires that we compute the PV of an infinite stream of dividends a. Can be difficult i. Use other models (Gordon growth model) d. The Gordon growth model i. Assumes constant dividend growth ii. Equation iii. Assumptions 1. Dividends continue growing at a constant rate forever a. As long as they are expected to grow at a constant rate for an extended period of time, the model should yield reasonable results i. Because errors about distant cash flows become small when discounted to the present
Background image of page 3

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

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/18/2011 for the course BUS 202 taught by Professor Kreft during the Winter '09 term at Indiana.

Page1 / 9

20 download_doc-10.php - BUS-G 345 I. Preview a. 1990s were...

This preview shows document pages 1 - 4. Sign up to view the full document.

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