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Unformatted text preview: Click to edit Master subtitle style Professor Paul J Irvine Terry College of Business University of Georgia DDM valuation KO Case Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 22 Stock Valuation l The fundamental valuation formula l PV is the intrinsic value of the stock l Security analysis is about determining the intrinsic value ( 29 ∑ ∞ = + = , ) 1 ( t t i t i i k CF E PV where CFi , t are cash flows ki is the discount rate Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 33 Simple Trading Strategies l If intrinsic value > market price £ buy l If intrinsic value < market price £ sell if positive holdings £ sell short if zero holdings l But what position size? Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 44 Dividend Discount Models: In the fundamental equation framework l V0 = Value of Stock l Dt = Dividend l k = required return Paul J Irvine Terry College of Business Table 13.1 Microsoft Corporation Financial Highlights 2009 13-5 Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 66 Dividend discount model l Uses dividend income as the cash flow l Use the CAPM to get a discount rate Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 77 No Growth Model: Example E1 = D1 = $5.00 k = .15 V0 = $5.00 / .15 = $33.33 Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 88 Constant Growth Model: Example E1 = $5.00 k = 15% D1 = ? g = ?% Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 99 Long Term Growth in EPS Method 1 l When looking at growth in earnings per share: Return on Investment = ROE = Net Income/Book Value of Equity l In the special case where the current ROE is expected to remain unchanged: gEPS = (Retained Earnings/ NI) * ROE = Retention Ratio * ROE = b * ROE l Proposition 1: The expected growth rate in earnings for a company cannot exceed its return on equity in the long term. l Corollary 1: The growth rate cannot exceed the cost of capital either. Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 1010 Estimating Dividend Growth Rates l g = growth rate in dividends l ROE = Return on Equity for the firm l b = plowback or retention percentage rate £ (1- dividend payout percentage rate) £ = 0.40 Suppose: Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 1111 Constant Growth Model: Example E1 = $5.00 b = 40% k = 15% ROE=20% (1-b) = 60% D1 = $3.00 g = 8% V0 = 3.00 / (.15 - .08) = $42.86 Plowback Paul J Irvine Terry College of Business Paul J Irvine Terry College of Business 1212 Shifting Growth Rates?...
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This note was uploaded on 06/05/2011 for the course FINA 4310 taught by Professor Staff during the Fall '08 term at UGA.

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