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07-Stock-valuation-FIN6406 - Stock Valuation n Preferred...

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Stock Valuation  Stock Valuation  11 Stock Valuation n Preferred stock valuation n Common stock valuation n Security market equilibrium n Supernormal growth stocks n Market efficiency levels
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Stock Valuation  Stock Valuation  22 0 1 2 3 . . . 8 10 10 10 . . . 10 What is the cash flow stream of a Preferred Stock with an annual dividend of $10?
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Stock Valuation  Stock Valuation  33 A Preferred Stock promises a perpetual cash flow stream of equal dividends at equal intervals into infinity. Vps = DIV ps Rps
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Stock Valuation  Stock Valuation  44 V10% = = $100 V13% = = $76.92 V7% = = $142.86 $10 0.10 $10 0.13 $10 0.07
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Stock Valuation  Stock Valuation  55 P0 = + + . . . ^ D1 (1 + Rs) D2 (1 + Rs)2 D (1 + Rs) Common Stock Valuation (PV of dividend stream) where the future dividend stream is: D1 = D0(1 + g) D2 = D1(1 + g) . . .
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Stock Valuation  Stock Valuation  66 P0 = = ^ D1 Rs - g D0 (1 + g) Rs - g If growth rate of earnings & dividends is (g) and constant , then: model requires that: n g expected to be constant forever n Rs > g (otherwise, negative price)
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Stock Valuation  Stock Valuation  77 b = 1.2 RRF = 10% RM = 15% What is the required rate of return?
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