stock_valuation___handouts

stock_valuation___handouts - Security Valuation Security...

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Security Valuation Security Valuation The intrinsic value of an asset = the present value of the stream of expected cash flows discounted at an appropriate required rate of return . Does this sound familiar? (Recall our discussion of bond valuation)
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Preferred Stock Preferred Stock A hybrid security : it’s like common stock - no fixed maturity . -technically, it’s part of equity capital. it’s like debt - preferred dividends are fixed . - missing a preferred dividend does not constitute default, but preferred dividends are usually cumulative .
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Usually sold for $25, $50, or $100 per share par value. Dividends are often quoted as a percentage of par. Example: In 1988, Xerox issued $75 million of 8.25% preferred stock at $50 per share. $4.125 is the fixed, annual dividend per share (i.e., $50 x .0825). Preferred Stock Preferred Stock
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Is usually non-voting , and non- participating . Priority : lower than debt, higher than common stock. Preferred Stock Preferred Stock
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HOW DO YOU VALUE UNENDING CASH FLOWS? This is an unending (i.e., infinite maturity) annuity. What do you know? Payment Discount rate maturity?
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Preferred Stock Valuation Preferred Stock Valuation Preferred stocks can usually be valued like a perpetuity: V = D k ps ps
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Example: Example: Xerox preferred pays $4.125 dividend per year. Suppose our required rate of return on Xerox preferred is 9.5%
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Example: Example: Xerox preferred that pays $4.125 dividend per year. Suppose our required rate of return on Xerox preferred is 9.5% V ps = 4.125 .095 = $43.42
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stock_valuation___handouts - Security Valuation Security...

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