Ch 07 Mini Case - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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Ch 7 Mini Case 5/1 /20 3 Chapter 7. Mini Case Situation a. Describe briefly the legal rights and privileges of common stockholders. Features of Common Stock Clas ified Stock b. (1.) Write out a formula that can be used to value any stock, regardles of its dividend pat ern. THE DISCOUNTED DIVIDEND AP ROACH Here is the basic dividend valuation equation: + + . . . . (2.) What is a constant growth stock? How are constant growth stocks valued? VALUING STOCKS WITH A CONSTANT GROWTH RATE 7% + 1.2(5%) = 13% (1.) What is the firm’s expected dividend stream over the next 3 years? (2.) What is the firm’s cur ent stock price? (3.) What is the stock's expected value 1 year from now? (4.) What are the expected dividend yield, the capital gains yield, and the total return during the first year? EXAMPLE: CONSTANT GROWTH 0 1 2 3 Continue to Infinty Do =2.0 2.12 2.2472 2.3820 1.876 1.760 1.651 Etc. ? Constant Growth Model: $2.0 g = 6% 13.0% = = $2.12 0.07 $30.29 Stock Price 1 year from now 2.2472 7.0 % 32.10 Dividend Yield Dividend Yield 2.12 $1.82 $30.29 $30.29 Dividend Yield 7.0 % 6.0 % Total Yield = Dividend Y + Total Yield = 13.0 % e. Now as ume that the stock is cur ently sel ing at $30.29. What is the expected rate of return on the stock? Rear ange to rate of return formula + g 2.12 + 6.0 % 32.10 13% f. What would the stock price be if its dividends were expected to have zero growth? EXAMPLE: PREFERRED STOCK (I.E., STOCK WITH ZERO GROWTH) The dividend stream would be a perpetuity. P = PMT ÷ r P = $2.0 ÷ 13.0 % P = $15.38 VALUING STOCKS WITH NON-CONSTANT GROWTH = $2.0 13.0% 30% Short-run g; for Years 1-3 only. 6% Long-run g; for Year 4 and al fol owing years. 30% 6% Year 0 1 2 3 4 Dividend $2.0 2.6 3.38 4.394 4.6576 PV of dividends $2.30 9 2.6470 3.0453 4.6576 $7.9 32 P4 = 6 .537 = Terminal value = $46.1 40 7.0% $54.1072 P4 = 6 .537 14 Dividend Yield 4.8% Dividend Yield = 7.0% 8.2% 6.0% Total Return = 13.0% Total Return = 13.0% DO STOCK PRICES REFLECT LONG-TERM OR SHORT-TERM CASH FLOWS? $46.1 40 Cur ent price: $54.1072 85.2% For most stocks, the percentage of the cur ent price that is due to long-term cash flows is over 80%. $2.0 13.0% 0% 6% 0% 6% Year 0 1 2 3 4 Dividend $2.0 $2.0 $2.0 $2.0 2.120 PV of dividends $1.769 1.56 3 1.3861 2.120 $4.72 3 P4 = 30.2857 = Terminal value = $20.9895 7.0% $25.71 8 $2.0 g = -6% 13.0% = = $1.8 0.19 $9.89 C & G Yield = -6.0 % Dividend Yield 19.0 % Total Return = 13.0% 2.0 g = 5.0% 10.0% = = $2.10 0.05 $42.0 Resulting Resulting % growth Last Price Last Price $42.0 $42.0 4% Dividend, D $34.67 9% Dividend, D $52.50 5% Dividend, D $42.0 10% Dividend, D $42.0 6% Dividend, D $53.0 1 % Dividend, D $35.0 m. What does market equilibrium mean?
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This note was uploaded on 12/01/2011 for the course ACCOUNTING 151 taught by Professor Larson during the Spring '11 term at Everest University.

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