Chap008s

# Chap008s - Stock Valuation Chapter Eight 1 Cash Flows for...

This preview shows pages 1–7. Sign up to view the full content.

Stock Valuation Chapter Eight 1

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

View Full Document
Cash Flows for Stockholders If you buy a share of stock, you can receive cash in two ways The company pays dividends You sell your shares, either to another investor in the market or back to the company As with bonds, the price of the stock is the present value of these expected cash flows 2
One Period Example Suppose you are thinking of purchasing the stock of Moore Oil, Inc. and you expect it to pay a \$2 dividend in one year and you believe that you can sell the stock for \$14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay? Compute the PV of the expected cash flows Price = (14 + 2) / (1.2) = \$13.33 Or FV = 16; I/Y = 20; N = 1; CPT PV = -13.33 3

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

View Full Document
Two Period Example Now what if you decide to hold the stock for two years? In addition to the dividend in one year, you expect a dividend of \$2.10 in and a stock price of \$14.70 at the end of year 2. Now how much would you be willing to pay? PV = 2 / (1.2) + (2.10 + 14.70) / (1.2) 2 = 13.33 – Or CF 0 = 0; C01 = 2; F01 = 1; C02 = 16.80; F02 = 1; NPV; I = 20; CPT NPV = 13.33 4
Three Period Example Finally, what if you decide to hold the stock for three periods? In addition to the dividends at the end of years 1 and 2, you expect to receive a dividend of \$2.205 at the end of year 3 and a stock price of \$15.435. Now how much would you be willing to pay? PV = 2 / 1.2 + 2.10 / (1.2) 2 + (2.205 + 15.435) / (1.2) 3 = 13.33 – Or CF 0 = 0; C01 = 2; F01 = 1; C02 = 2.10; F02 = 1; C03 = 17.64; F03 = 1; NPV; I = 5

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

View Full Document
Developing The Model You could continue to push back when you would sell the stock You would find that the price of the stock
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 09/12/2011 for the course BUAD 304 at USC.

### Page1 / 23

Chap008s - Stock Valuation Chapter Eight 1 Cash Flows for...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online