chp 8 - Stock Valuation Chapter Eight Chapter Outline...

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Stock Valuation Chapter Eight
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Chapter Outline Common Stock Valuation Some Features of Common and Preferred Stocks The Stock Markets
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Cash Flows for Stockholders If you buy a share of stock, you can receive cash in two ways The company pays dividends ( shares profit) You sell your shares, either to another investor in the market or back to the company As with bonds, the price of the stock is the present value of these expected cash flows
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Cash Flows for Stockholders 0 1 2 3 4 5 0 1 2 3 4 5 |----------|----------|----------|----------|----------| P 0 D 1 P 1 [ ] [ ] ( 29 1 1 0 D P P 1 t t E E r + = +
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Cash Flows for Stockholders 0 1 2 3 4 5 0 1 2 3 4 5 |----------|----------|----------|----------|----------| P 0 D 1 P 1 D 2 P 2 [ ] ( 29 [ ] [ ] ( 29 1 2 2 0 2 D D P P 1 1 t t t E E E r r + = + + +
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Cash Flows for Stockholders 0 1 2 3 4 5 0 1 2 3 4 5 |----------|----------|----------|----------|----------| P 0 D 1 P 1 D 2 P 2 D 3 P 3 [ ] ( 29 [ ] ( 29 [ ] [ ] ( 29 1 2 3 3 0 2 3 D D D P P 1 1 1 t t t t E E E E r r r + = + + + + +
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Cash Flows for Stockholders 0 1 2 3 4 5 0 1 2 3 4 5 |----------|----------|----------|----------|----------| P 0 D 1 P 1 D 2 P 2 D 3 P 3 D 4 P 4 [ ] ( 29 [ ] ( 29 [ ] ( 29 [ ] [ ] ( 29 1 2 3 4 4 0 2 3 4 D D D D P P 1 1 1 1 t t t t t E E E E E r r r r + = + + + + + + +
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Cash Flows for Stockholders 0 1 2 3 4 5 0 1 2 3 4 5 |----------|----------|----------|----------|----------| P 0 D 1 P 1 D 2 P 2 D 3 P 3 D 4 P 4 D 5 P 5
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Developing The Model You could continue to push back when you would sell the stock You would find that the price of the stock is really just the present value of all expected future dividends So, how can we estimate all future dividend payments? [ ] ( 29 [ ] ( 29 [ ] ( 29 [ ] [ ] ( 29 1 2 3 0 2 3 D D D D P 1 1 1 1 t t t t t E E E E E P r r r r + = + + +⋅⋅⋅+ + + + +
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Estimating Dividends: Special Cases Constant dividend The firm will pay a constant dividend forever
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