Chapter+9_S

Chapter+9_S - Valuing Stocks Chapter 9, BDH 9.1 Stock...

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Valuing Stocks Chapter 9, BDH
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Chapter Outline 9.1 Stock Basics 9.2 The Dividend-Discount Model 9.3 Estimating Dividends in the Dividend- Discount Model 9.4 Total Payout and Free Cash Flow Valuation Models 9.5 Valuation Based on Comparable Firms 9.6 Information, Competition, and Stock Prices 1
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Learning Objectives Understand the features of common stock Value a stock as the present value of its expected future dividends Understand the tradeoff between dividends and growth in stock valuation Value a stock as the present value of either the company’s total payout or its free cash flows Value a stock by applying common multiples based on the values of comparable firms Compare and contrast different approaches to valuing a stock Understand how information is incorporated into stock prices through competition in efficient markets 2
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9.1 Stock Basics Features of common stock (ordinary share) investment with limited liability a share of ownership in the corporation gives its owner rights to vote on company matters or other major events carries the right to share in the profits of the corporation through dividend payments residual claims on firm’s net assets 3
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9.2 The Dividend-Discount Model Intuitions A One Year Investor Dividend Yields, Capital Gains, and Total Returns Multiyear Investor and Dividend-Discount Model Equation The Dividend-Discount Model Equation 4
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A One-Year Investor Two Potential Sources of Cash Flows from Stock The firm might pay out cash to its shareholders in the form of a dividend The investor might generate cash by selling the shares at some future date (resulting in capital gain/loss) Total Cash Inflows Dividends expected to be received during investment period Expected selling price of shares at end of holding period 9.2 The Dividend-Discount Model 5
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Dividend Yields, Capital Gains, and Total Returns Total Return Sum of the dividend yield and the capital gain rate Dividend Yield Expected annual dividend divided by its current price. Capital Gain Difference between the expected sale price and the original purchase price for the stock 9.2 The Dividend-Discount Model 6
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Dividend Yields, Capital Gains, and Total Returns The total return of a stock should also be equal its equity cost of capital. The expected total return of the stock should equal the expected return of other investments available in the market with equivalent risk. 10 1 1 1 0 0 0 Dividend Yield Capital Gain Rate 1 E PP Div P Div r P P P   Total Return Eq.(9.2) 9.2 The Dividend-Discount Model 7
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Equity Cost of Capital r E the expected return of other investments available in the market with equivalent risk to the firm’s share.
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This note was uploaded on 07/30/2011 for the course FIN 111 taught by Professor Mark during the Spring '11 term at HKU.

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Chapter+9_S - Valuing Stocks Chapter 9, BDH 9.1 Stock...

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