P1 - per year • What is the value of MPR stock • The Corporate Valuation Model • The Dividend Discount Model is a special case of equity

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II. Security Selection A. Complete Valuation of a Simple Company Basic Concept of Valuation Three ideas Investors can only spend cash; more cash is better than less. Cash today is more valuable than cash in the future. A risky potential cash flow is less valuable than a certain one. The value of an asset depends on the size, timing and risk of its cash flows. Application: Bond Pricing MPR Inc. decides to issue bonds to raise capital. Annual coupons of $90, Face value of $1000. The required rate of return by MPR’s debtholders is r D =9%, Depends on current economic conditions, and on the risk of the bonds, It is a required rate of return because it is the rate investors feel appropriate given the risk of the investment. If they don’t expect to earn this going in, they won’t invest. It is also the (pre-tax) cost of debt to MPR Application: The Dividend Discount Model MPR Inc. pays annual dividends and has just paid a dividend of D 0 =$2.34 per share. Your able assistant tells you that dividends are expected to grow at a rate of 5%
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Unformatted text preview: per year. • What is the value of MPR stock? • The Corporate Valuation Model • The Dividend Discount Model is a special case of equity valuation: – The value of a stock is the present value of expected future dividends. • It may not be very helpful to a portfolio manager or an analyst: – How can we find the value of a company that does not pay dividends? – How do you value a division within a company? • Use the Corporate Valuation Model – Discounted cash flow valuation (DCF) – The Corporate Valuation Model (Con’t) • Find the present value of the cash flows that are available for distribution to all of the company’s investors, – They are the free cash flows (FCF) • Discount them at the average rate of return required by all investors, – This is the weighted average cost of capital (WACC), – It represents the average cost of each dollar of financing for a company’s business....
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This note was uploaded on 04/05/2012 for the course FIN 456 taught by Professor Davidweinbaum during the Spring '12 term at Syracuse.

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P1 - per year • What is the value of MPR stock • The Corporate Valuation Model • The Dividend Discount Model is a special case of equity

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