Ch11_Stock valuation and risk

Ch11_Stock valuation and risk - Chapter11...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Financial Markets and Institutions Chapter 11 Stock Valuation and Risk
Background image of page 1

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

View Full DocumentRight Arrow Icon
Financial Markets and Institutions Stock Valuation Methods Dividend discount model John Williams (1931) stated that the price of a  stock should reflect the present value of the  stock’s future dividends: = + = 1 ) 1 ( Price t t t k D k
Background image of page 2
Financial Markets and Institutions Stock Valuation Methods (cont’d) Dividend discount model (cont’d) For a constant dividend, the cash flow is a  perpetuity: For a constantly growing dividend, the cash  flow is a growing perpetuity: k D k D t t t = + = = 1 ) 1 ( Price g k D k D t t t - = + = = 1 1 ) 1 ( Price
Background image of page 3

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

View Full DocumentRight Arrow Icon
Financial Markets and Institutions Valuing A Stock Using the Dividend  Discount Model Example 1  : A firm is expected to pay a dividend  of $2.10 per share every year in the   foreseeable future. Investors require a return  of 15% on the firm‘s stock. According to the  dividend discount model, what is a fair price ?for the firm‘s stock 14 $ % 15 10 . 2 $ ) 1 ( Price 1 = = = + = = k D k D t t t
Background image of page 4
Financial Markets and Institutions Valuing A Stock Using the Dividend  Discount Model Example 2  : A firm is expected to pay a dividend  of $2.10 per share in one year. In every  subsequent year, the dividend is expected to  grow by 3 percent annually. Investors  require a return of 15% on the firm‘s stock.  According to the dividend discount model, ?what is a fair price for the firm‘s stock 50 . 17 $ % 3 % 15 10 . 2 $ ) 1 ( Price 1 1 = - = - = + = = g k D k D t t t
Background image of page 5

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

View Full DocumentRight Arrow Icon
Financial Markets and Institutions Stock Valuation Methods The price-earnings (PE) method assigns the  mean PE ratio based on expected earnings  of all traded competitors to the firm’s  expected earnings for the next year
Background image of page 6
Financial Markets and Institutions Valuing A Stock Using the PE Method  A firm is expected to generate earnings of $2
Background image of page 7

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

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This document was uploaded on 08/05/2011.

Page1 / 27

Ch11_Stock valuation and risk - Chapter11...

This preview shows document pages 1 - 8. Sign up to view the full document.

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