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Problem Day Equity Valuation Blackboard

Problem Day Equity Valuation Blackboard - ProblemDay:Equity...

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Problem Day: Equity  Valuation

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Housekeeping Items POW Quiz this week due Thursday at 5pm Ch. 11 Reading Quiz due Monday morning at 8am  Come to lab hours if you want to see your scantron and  review your test Course email: [email protected]
Today’s Agenda Preferred Stock Gordon Growth Two-stage Growth

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Preferred Stock p p p p p p p p p p p R D R D R D R D R D P = + + + + + + + + + = ) 1 ( ... ... ) 1 ( ) 1 ( ) 1 ( 3 2 1 dividends stock preferred for return of rate required The R alue constant v a stock, preferred for dividend Annual D stock preferred of Price P p p p = = = \$53.85 .13 \$7.00 P 13% R \$7.00 D p p p = = = = P p p R D P =

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Preferred Stock Example Current Price = \$53.85 Preferred Dividend = \$7.00 What is the required rate of return? Answer:  Can you find  the required rate  of return if  given the  dividend? 13% \$53.85 \$7.00 P D R \$7.00 D 53.85 P p p p p p = = = = =
Mr. Buffett likes Preferreds

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Constant Growth   (Gordon  Growth) The Present Value of  a Constant Dividend  Growth Stock looks  similar to a  perpetuity! P0 = PV today D1 = Dividend 1 Year  from now R E  = Required Rate g = Growth Rate g R D P E - = 1 0
Required Return on a Stock Change the constant  growth formula around .15 .05 \$50.00 \$5.00 \$5.00 D 5% g \$50 P 1 0 = + = = = = g P D R 0 1 e + =

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Mr. Buffett likes Common  Stock too
2 stage growth Biffco just paid a dividend of \$2.50 per share. Growth in dividends for the company is projected at 16% for the next 4 years. After this period, the firm will grow at a rate of 7% forever. Your required rate of return is 18%. How much should you expect to pay for the stock? Recent Dividend \$2.50 First 4 years growth rate 16% After 4 years growth rate 7% Required return 18%

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2 stage growth 0 1 2 3 4 5 6 7 Recent Dividend \$2.50 First 4 years growth rate 16% After 4 years growth rate 7% Required return 18% Step 1 – Break it into 2 parts
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Problem Day Equity Valuation Blackboard - ProblemDay:Equity...

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