ch08_061505 - CHAPTER8 Efficientmarkets Preferredstock 81...

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    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
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    8-2 Facts about common stock Represents ownership Ownership implies control Stockholders elect directors Directors elect management Management’s goal: Maximize the  stock price
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    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.
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    8-4 Types of stock market transactions Secondary market Primary market Initial public offering market (“going  public”)
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    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
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    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
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    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
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    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
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    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 = + - = = = = + - = = =
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    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
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    8-11 Market Price as a function of discounted  earnings per share and Potential for  Growth (PVGO) 1 0 E P PVGO k = + Earnings per share Potential for Growth Appropriate risk adjusted discount rate
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    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. 0 ^ 3 1 2 1 2 3 ... (1 ) (1 ) (1 ) (1 ) s s s s D D D D P k k k k = + + + + + + + +
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    8-13 Constant growth stock A stock whose dividends are expected to  grow forever at a constant rate, g.
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