{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

393_lecture9 - Stock Valuation Lecture 9 Myung Joo Song...

Info icon This preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Stock Valuation Lecture 9 Myung Joo Song ECON 393 Fall 2011 Myung Joo Song (ECON 393) Stock Valuation Fall 2011 1 / 26
Image of page 1

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

View Full Document Right Arrow Icon
Chapter Outline Common Stock Valuation using Present Value Model. Some Features of Common and Preferred Stocks. The Stock Markets. Myung Joo Song (ECON 393) Stock Valuation Fall 2011 2 / 26
Image of page 2
Value Stock as an Asset Now you are an expert in Present Value (PV) model. You also have a big example of Bond. Use PV to value stock, an asset giving future incomes and also is traded in the market. What do you need to value stock? - Structure of Future Cash Flows - Number of Period - Discount rate - Market required rate if traded in the market - or your subjective point of view Myung Joo Song (ECON 393) Stock Valuation Fall 2011 3 / 26
Image of page 3

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

View Full Document Right Arrow Icon
Cash Flows for Stockholders Have a quick review on stock definition. Stock generates income and capital gains. If you buy stock today, you can receive; Dividends as income (Income Gain) Future price of stock once you sell it (Capital Gain) So, you need two things: There is no default. There is a market for the stock. What if you miss one of the two? What is different between stock and bond in term of cash-generating? Myung Joo Song (ECON 393) Stock Valuation Fall 2011 4 / 26
Image of page 4
Example: One-Period Suppose you are thinking of purchasing the stock of Moore Oil, Inc. 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 Myung Joo Song (ECON 393) Stock Valuation Fall 2011 5 / 26
Image of page 5

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

View Full Document Right Arrow Icon
Example: Two-Period 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 two years 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 Myung Joo Song (ECON 393) Stock Valuation Fall 2011 6 / 26
Image of page 6
Example: Three-Period Finally, what if you decide to hold the stock for three years? 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 the stock price is expected to be $15.435.
Image of page 7

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

View Full Document Right Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern