07-Stock-valuation - Stock Valuation Preferred stock...

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Stock Valuation  1 Stock Valuation Preferred stock valuation Common stock valuation Security market equilibrium Supernormal growth stocks Market efficiency levels
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Stock Valuation  2 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  3 A Preferred Stock promises a perpetual cash flow stream of equal dividends at equal intervals into infinity. V ps = DIV ps R ps
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Stock Valuation  4 V 10% = = $100 V 13% = = $76.92 V 7% = = $142.86 $10 0.10 $10 0.13 $10 0.07
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Stock Valuation  5 P 0 = + + . . . ^ D 1 (1 + R s ) D 2 (1 + R s ) 2 D (1 + R s ) Common Stock Valuation (PV of dividend stream) where the future dividend stream is: D 1 = D 0 (1 + g) D 2 = D 1 (1 + g) . . .
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Stock Valuation  6 P 0 = = ^ D 1 R s - g D 0 (1 + g) R s - g If growth rate of earnings & dividends is (g) and constant , then: model requires that: g expected to be constant forever R s > g (otherwise, negative price)
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This note was uploaded on 10/04/2011 for the course FIN 6406 taught by Professor Sturm,r during the Spring '08 term at University of Central Florida.

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07-Stock-valuation - Stock Valuation Preferred stock...

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