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Day 6-Part 2 Slides-Ch 7-7.7.11

Day 6-Part 2 Slides-Ch 7-7.7.11 - Day6:Part2.2...

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Business Management 301 Day  6: Part 2.2 Chapter 7: Stock Valuation July 7, 2011
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Thought for the Day Elder Ballard:   “I am so thoroughly  convinced that if we don’t set goals in our  life and learn how to master the technique  of living to reach our goals, we can reach a  ripe old age and look back on our life only  to see that we reached but a small part of  our full potential.” What are the basic principles of goal- setting? Are your goals meaningful? Do you have any BHAG’s?
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Common Stock Valuation (Multiple Holding Periods) Constant Growth Model: Assumes common stock dividends will  grow at a constant rate into the future. Can we value a perpetuity that grows at a  constant rate??
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Common Stock Valuation (Multiple Holding Periods) Constant Growth Model: Assumes common stock dividends will  grow at a constant rate into the future. (aka “Gordon Growth Model” or GGM) V cs 0 = D 1 k     -  g cs
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Constant Growth Model: Assumes common stock dividends will grow at a  constant rate into the future. D 1 :  the dividend at the end of period 1.  [D 1 = D 0 *(1+g)] k cs :  the required return on the common stock. g:  the constant, annual dividend growth rate Remember:  Sustainable Growth = g* = ROE x (1-b) V cs 0 = D 1 k     -  g cs b = payout ratio (i.e. dividends/NI)
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Justice stock recently paid a  $5.00 dividend .   The dividend is expected to  grow at 10%   per year indefinitely.    What would we be willing to pay if our  required return  on Justice stock is  15% ? Formula: D 1  = D o *(1+g)  D o    = $5,    so    D    = $5,    so    D 1     =  5 (1.10)  =  $5.50     =  5 (1.10)  =  $5.50 Gordon Growth Model Example #1
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Justice stock recently paid a  $5.00 dividend .  The dividend is  expected to  grow at 10%  per year indefinitely.  What would we be willing to pay if our  required return  on  Justice stock is  15% ? D = $5.00   g   = 10% k cs  = 15%   V cs  =              =               =  $110 D 0 *(1 + g)           5.50       k cs   -   g 0.15  -  0.10 Gordon Growth Model Example #1 D 1
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Berken stock recently paid a  $3.50 dividend .   The dividend is expected to  grow at 8%  per  year indefinitely.    What would we be willing to pay if our  required  return  on Berken stock is  11.5% ? Formula: D 1  = D o *(1+g)  D o    = $3.50,    so    D    = $3.50,    so    D 1     =  3.50 (1.08)  =  $3.78     =  3.50 (1.08)  =  $3.78 Gordon Growth Model Example #2
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Berken stock recently paid a  $3.50 dividend .  The dividend is  expected to  grow at 8%  per year indefinitely.  What would we be willing to pay if our  required return  on  Berken stock is  11.5% ?
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