04 Fin 301 Equity valuation Ulearn

# 04 Fin 301 Equity - Equity Valuation What Does an Equity Holder Get Vote for Directors Right to hire and fire senior management Dividend Stream

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1 Equity Valuation 2 What Does an Equity Holder Get? ± Vote for Directors ± Right to hire and fire senior management ± Dividend Stream ± Assume stock pays dividends once at the end of each period. How much is it worth today? 1 P 0 P 1 + D 1 0 ) 1 ( 1 1 0 r D P P + + = 3 But What is Next Period’s Price? + + = ) 1 ( 2 2 1 r D P P 2 2 2 2 1 1 2 2 0 ) 1 ( ) 1 ( ) 1 ( ) 1 ( 1 ) 1 ( r P r D r D r D r D P P + + + + + = + + + + =

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2 4 Eventually. .. + + = ) 1 ( 3 3 2 r D P P 3 3 3 3 2 2 1 0 ) 1 ( ) 1 ( ) 1 ( ) 1 ( r P r D r D r D P + + + + + + + = = + = 1 0 ) 1 ( t t t r D P 5 Assumptions: Constant Dividends = = = t t D D t to from 1 What is this? r D r D P t t t = + = = 1 0 ) 1 ( Perpetuity! 6 Assumptions: Constant Growth ± Growing Perpetuity: g r g D g r D P t t t + = = + ) 1 ( 1 Gordon Growth Model t t t g D g D D ... g D g D D g D D ) 1 ( ) 1 ( ) 1 ( ) 1 ( ) 1 ( 0 1 2 0 1 2 0 1 + = + = + = + = + = g P D r g r D P + = = 0 1 1 0 Capital gains yield Dividend yield 1 1 = + t t P P g
3 7 Example Question #1: Rearden Steel ± Expected dividend next year: \$3.00 ± Expected dividend growth: 10.00% ± Discount rate for Rearden stock: 15.00% ± What is the price per share for Rearden stock? % 15 % 10 00 . 3 \$ 1 = = = r g D 00 . 60 \$ 10 . 15 . 00 . 3 \$ 0 = = P 8 Rearden Example Cont’d ± Rearden Steel future stock price: 60 . 72 \$ 10 . 15 . 63 . 3 \$ 10 . 15 . 1 . 1 3 \$ 00 . 66 \$ 10 . 15 .

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## This note was uploaded on 11/01/2011 for the course BUSINESS FIN301 taught by Professor Andrew during the Fall '10 term at University of Alberta.

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04 Fin 301 Equity - Equity Valuation What Does an Equity Holder Get Vote for Directors Right to hire and fire senior management Dividend Stream

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