18BUSI408 - Stock Valuation1

18BUSI408 - Stock Valuation1 - BUSI 408 Corporate Finance...

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Chip Snively Chip_snively@unc.edu Stock Valuation BUSI 408 Corporate Finance Fall 2011
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2 Read (continue) RWJ9 – Stock Valuation We’ll review some problems, and look at some additional valuation ideas Homework RWJ8: Q – 1,2,6,8,10; P – 1,2,3,5,6,10 Submit MidTerm Extra Credit HW Next Class
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3 Agenda Demonstrate that discounted cash flow analysis (DCF, or present value) provides the conceptual foundation for valuation of equity shares (stocks). If the goal of the firm is to maximize shareholder value, we need to know what determines the ‘value’ of equity shares! We will act as “outsiders looking in”, like regular investors. We don’t have the specific information that management possesses.
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4 Important Concept Recall that bondholders receive returns in 2 ways: interest payments and principal repayments Recall further that the “current yield” plus the expected capital gain/loss (assuming no change in interest rates) equals the bond’s YTM (i.e. its required rate of return ) The market price of a bond is always the present value of the future interest and principal payments (calculated using the current market interest rate on a bond of similar risk), so… Bond holders do not have to hold bonds to maturity – they can always sell a bond in the open market to ‘capture’ the discounted value of the FV payments.
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5 Equity Claims are Similar Equity holders are in the exact same situation as bondholders, except that there is no ‘principal’ repayment Equity holders receive dividends and (ultimately) liquidation value as returns on capital But they don’t have to wait until liquidation! The market price of a share is the present value of all
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18BUSI408 - Stock Valuation1 - BUSI 408 Corporate Finance...

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