361-CH9Concise - 9-1CHAPTER 9Stocks and Their Valuation Features of common stockDetermining common stock valuesPreferred stock9-2Facts about common

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: 9-1CHAPTER 9Stocks and Their Valuation Features of common stockDetermining common stock valuesPreferred stock9-2Facts about common stockRepresents ownershipOwnership implies controlStockholders elect directorsDirectors elect managementManagement’s goal: Maximize the stock price9-3Intrinsic Value and Stock PriceOutside investors, corporate insiders, and analysts use a variety of approaches to estimate a stock’s intrinsic value (P).In equilibrium we assume that a stock’s price equals its intrinsic value.Outsiders estimate intrinsic value to help determine which stocks are attractive to buy and/or sell.Stocks with a price below (above) its intrinsic value are undervalued (overvalued).9-4Determinants of Intrinsic Value and Stock Prices (Figure 1-1)9-5Different approaches for estimating the intrinsic value of a common stockDividend growth modelCorporate value modelUsing the multiples of comparable firms9-6Dividend growth modelValue of a stock is the present value of the future dividends expected to be generated by the stock.∞∞++++++++=)r(1D ... )r(1D )r(1D )r(1D Ps3s32s21s1^9-7Constant growth stockA stock whose dividends are expected to grow forever at a constant rate, g.D1 = D (1+g)1D2 = D (1+g)2Dt = D (1+g)t If g is constant, the dividend growth formula converges to:g -rD g -rg)(1D Ps1s^=+=9-8Future dividends and their present valuestt ) g 1 ( DD+=ttt)r 1 (DPVD+=tPVDP∑=$0.25Years (t)9-9What happens if g > rs?If g > rs, the constant growth formula leads to a negative stock price, which does not make sense.The constant growth model can only be used if:rs > gg is expected to be constant forever9-10If rRF = 7%, rM = 12%, and b = 1.2, what is the required rate of return on the firm’s stock?Use the SML to calculate the required rate of return (rs):rs= rRF + (rM – rRF)b= 7% + (12% - 7%)1.2= 13%9-11If D = $2 and g is a constant 6%, find the expected dividend stream for the next 3 years, and their PVs....
View Full Document

This note was uploaded on 01/23/2012 for the course BUS 361 taught by Professor Staff during the Fall '11 term at University of Michigan.

Page1 / 35

361-CH9Concise - 9-1CHAPTER 9Stocks and Their Valuation Features of common stockDetermining common stock valuesPreferred stock9-2Facts about common

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