ch08_061505 - 8-1 CHAPTER 8 Stocks and Their Valuation...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

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

Unformatted text preview: 8-1 CHAPTER 8 Stocks and Their Valuation Features of common stock Determining common stock values Equilibrium in the Markets for Stocks Efficient markets Preferred stock 8-2 Facts about common stock Represents ownership Ownership implies control Stockholders elect directors Directors elect management Management’s goal: Maximize the stock price 8-3 Social/Ethical Question Should management be equally concerned about employees, customers, suppliers, and “the public,” or just the stockholders? In an enterprise economy, management should work for stockholders subject to constraints (environmental, fair hiring, etc.) and competition. 8-4 Types of stock market transactions Secondary market Primary market Initial public offering market (“going public”) 8-5 Different Approaches to Valuing Stocks Balance Sheet Methods Book Value: Net worth per share = Equity/ # of Shares Liquidation Value Replacement cost (of assets) less liabilites 8-6 Different approaches for valuing common stock Market Price vs Intrinsic Value Expected Holding Period Return (HPR) model vs CAPM (required return) Expected Holding Period Return (HPR) model vs Intrinsic value (Dividend growth model) Corporate value model Using the multiples of comparable firms 8-7 Expected Holding Period Return (HPR) Generated by the Firm 1 1 ( ) [ ( ) ] ( ) o i o E D E P P E r P +- = Expected Future Return Expected Future Dividend Current Stock Price Expected Stock price in one year Expected Capital Appreciation 8-8 HPR: An example 1 1 ( ) $4 ( ) $52 48 o E D E P P = = = $4 [$52 $48] ( ) 16.7% $48 i E r +- = = Let Then 8-9 Expected Return (HPR) vs Required Return (CAPM) [ ( ) ]* Let 6%, ( ) 11%, 1.2, then 6% [11% 6%]*1.2 12% and since ( ) 16.7% 12%, then buy more stock. i rf M rf i rf M i i i i k r E r r r E r k E r k β β = +- = = = = +- = = = 8-10 Intrinsic Value (Dividend Growth Model) 1 1 ( ) ( ) (1 ) risk adjusted interest rate if , then buy less or sell the firm , then buy the firm o o o o o E D E P V k k V P V P + = + = < Expected Value of Dividends in one year Expected Market Price in one year Discount Factor 8-11 Market Price as a function of discounted earnings per share and Potential for Growth (PVGO) 1 E P PVGO k = + Earnings per share Potential for Growth Appropriate risk adjusted discount rate 8-12 Dividend growth model (Derived from the Intrinsic Value Model) Value of a stock is the present value of the future dividends expected to be generated by the stock....
View Full Document

This note was uploaded on 09/05/2011 for the course FIN 4405 taught by Professor Cowan during the Spring '11 term at Fairleigh Dickinson.

Page1 / 45

ch08_061505 - 8-1 CHAPTER 8 Stocks and Their Valuation...

This preview shows document pages 1 - 13. Sign up to view the full document.

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