Chapter 7 - Principles of Finance FIN 3100 Chapter 7 Stocks...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Principles of Finance FIN 3100 Chapter 7 Stocks and Stock Valuation 1 Patty Robertson Agenda Explain the basic characteristics of common stock. Learn models to value stock, including preferred stock. Understand the concept of efficient markets. 2 Abbreviations 3 D0 = Dividend last paid D1 = Next dividend to be paid D2 = The dividend after that Note: Most dividend-paying firms pay dividends quarterly. We, however, will assume annual dividends. An easy adjustment would be needed for quarterly dividends so that the r and t match. Debt Versus Equity A firm makes funding decisions by deciding how to raise money (debt or equity) to support spending decisions. 4 Assets $1,000 Debt $400 Equity $600 Total Assets $1,000 Total Debt & Equity $1,000 Balance Sheet Equity Financing Another major source of financing for a firm is issuing stock, or selling ownership in the firm to the public. Unlike debt, stock is considered permanent financing. 5 Assets $1,000 Debt $400 Equity $600 Total Assets $1,000 Total Debt & Equity $1,000 Balance Sheet Common Stock Ownership Common stock represents an equity claim , a claim to firm assets and cash flows once debt claimants are paid. It is a residual claim after employees, suppliers, taxes, and creditors have been paid. In Chapter 1, we learned that the primary goal of financial management is to maximize the current stock price . 6 Valuing Stock Bonds are relatively easy to value since the cash flows are certain. Stocks are more difficult to value for several reasons. 7 YTM Valuing Stock Regardless of the certainty of cash flows, we can still use present value techniques to discount expected cash flows to value stocks. Consider these expected cash flows for a stock you might buy: A $10 dividend is expected at the end of the year. You plan to sell the stock at the end of the year and you think it will be worth $100. 8 0 1 $100 $10 Valuing Stock How much would you pay for this stock to get these expected cash flows if you require a 12% rate of return? 9 0 1 $100 $10 Two sources of expected cash flows Valuing Stock We can modify the present value formula for stocks as follows: PV = FV t /(1 + r ) t P = (D 1 + P 1 )/(1 + R ) t Where, P 0 = Current price of the stock 10 Valuing Stock So far, weve said the stock price today (P ) is the sum of all future cash flows....
View Full Document

Page1 / 96

Chapter 7 - Principles of Finance FIN 3100 Chapter 7 Stocks...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online