© All Rights Reserved

6 views

© All Rights Reserved

- Exam Fin370 W2009 b Key
- Engineering Economics
- FIE402N 2015 Course Package Case Full
- Becton Dickinson BDX Thesis East Coast Asset Mgmt
- Anderson v. Philadelphia Warehouse Co., 111 U.S. 479 (1884)
- Financial Management Time Value of Money Lecture 2,3 and 4
- Time value of money
- chapter9-practiceproblems
- Cash Flow Measures in Corporate Analysis_Sep2012
- Indofood
- melco crown entertainment (1)
- Lesson Plan Mat112 (1)
- Financial Management Notes
- YHOO Q409EarningsPresentation Final
- Corpo-SummaryUPDATED.docx
- Accounting Exam Answers 2001
- 2 UNIT MIRR
- 2009-09-21_164631_Fin571_1
- GIS General Mills 2018 CAGNY Presentation
- CAIIB-Syllabus

You are on page 1of 20

Preferred stock

Features of common stock

Determining common stock

values

Efficient markets

1

Preferred Stock

Hybrid security.

Similar to bonds in that preferred

stockholders receive a fixed dividend that

must be paid before dividends can be paid on

common stock.

However, unlike interest payments on bonds,

companies can omit dividend payments on

preferred stock without fear of pushing the

firm into bankruptcy.

2

Vp =

D

D

D

D

+

+

+

.

.

.

+

(1+ ks )1 (1+ ks )2 (1+ ks )3

(1+ ks )

(an annuity with no maturity).

0

13%

3

...

20.00

20.00

20.00

4

3

present value of each dividend decreases

as time until receipt increases.

N

PV

FV

13

17.70

20.00

13

10.86

20.00

50

13

0.04

20.00

100

13

0.0001

20.00

4

payments have a present value of

virtually zero.

This allows us to develop a simple

formula to calculate the value of preferred

stock.

D

Vp =

kp

Vp = value of preferred

D = dividend

kp = discount rate

5

13%, what is the value of a preferred

stock with a par value of $200 that

promises to pay a dividend equal to

10% of par?

D

20.00

Vp =

=

= 153.85

kp

0.13

6

Preferred Stock

The value of a preferred stock can be

found using the calculator. Treat the stock

as an annuity (end mode) with a large

number of payments (e.g., n=1000).

INPUTS

OUTPUT

1000

N

13

I/YR

PV

-153.85

20

PMT

FV

Represents ownership.

Ownership implies control.

Stockholders elect directors.

Directors elect management.

Managements goal: Maximize the

stock price.

8

Common Stock

Dividend growth model

Free cash flow method

Using the multiples of comparable

firms

P 0 =

D1

D2

D3

(1 + k ) (1 + k ) (1 + k )

1

+. . .+

(1 + k )

One whose dividends are expected to

grow forever at a constant rate, g.

10

can again develop a simple

formula to value the stock.

P0 =

D1

D0(1 + g)

=

ks g

ks g

D0 = old dividend

D1 = new (or next) dividend

g = dividend growth rate

ks = appropriate discount rate (ks > g)

11

If g > ks, the constant growth formula

leads to a negative stock price,

which does not make sense.

The constant growth model can only

be used if:

ks > g

g is expected to be constant

forever

12

kM = 12%. What is the required

rate of return on the firms stock?

ks= kRF + (kM kRF)bFirm

= 7% + (12% 7%) (1.2)

= 13%

13

D1 = 3.50, ks = 13%, g = 6%.

Constant growth model:

P0 =

D1

ks g

=

$3.50

0.07

3.50

0.13 0.06

= $50.00

14

D0 = 2.00, ks = 13%, g = 6%.

Constant growth model:

P0 =

D0(1+g)

ks g

$2.12

0.07

2(1+0.06)

0.13 0.06

= $30.29

15

^

one year from now, P1?

D1 will have been paid, so expected

dividends are D2, D3, D4 and so on.

Thus,

^

P1 =

D2

ks g

= $32.10.

$2.247

0.13 0.06

^

Could also find P

1 as follows:

^

P1 = P0(1.06) = $32.10.

16

capital gains yield, and total return

during the first year.

D1

$2.12

=

= 7.0%.

P0

$30.29

^

P1 P0 $32.10 $30.29

Cap gains yld =

=

$30.29

P0

= 6.0%.

Dividend yld =

17

P 0 =

D1

D1

+ g.

to k s =

g

ks

P0

= 0.07 + 0.06 = 13%.

18

model

Often stocks do not have constant

growth.

Instead, it is possible that they are

currently undergoing a period of high or

low growth relative to its average

growth.

For these stocks we need a different

valuation model.

19

Dt

P0 =

t

t =1 (1 + k s )

DN (1 + g)

ks g

+

(1 + k s )N

the unusual growth period.

20

In words the formula has three parts.

1. Calculate the expected dividends during

the unusual growth period.

2. Calculate the value of the stock at the end

of unusual growth using the constant

growth model.

3. Calculate the present value of the amounts

found in steps 1 and 2.

21

of 30% for 3 years, the dividend

last year was $2.00, and the

long-run constant growth rate

is 6%, what should be the price

of the stock if the appropriate

discount rate is 13%.

22

D1 = 2.00(1+0.30) = 2.60

D2 = 2.60(1+0.30) = 3.38

D3 = 3.38(1+0.30) = 4.394

Step 2: Calculate value of stock at end of

unusual growth period using constant

growth model.

P3 =

=

= $66.54

.13 - .06

k s - gc

23

the amounts in steps 1 and 2. (This is

an uneven cash flow problem.)

CF0 = 0

CF1 = 2.60

CF2 = 3.38

CF3 = 4.394 + 66.54

I = 13

NPV = 54.11

24

D/P and capital gains yield are not

constant, and

capital gains yield is not equal to g.

After t = 3,

g = constant = 6% = capital gains yield;

k = 13%; so D/P = 13% 6% = 7%.

25

The free cash flow method suggests

that the value of the entire firm

equals the present value of the firms

free cash flows (calculated on an

after-tax basis).

The free cash flow in any given year

can be calculated as:

NOPAT Net capital investment

26

Once the value of the firm is estimated,

an estimate of the stock price can be

found as follows:

MV of common stock (market

capitalization) = MV of firm MV of

debt and preferred stock.

^

27

Flow Method

Free cash flow method is often

preferred to the dividend growth

model--particularly for the large

number of companies that dont pay

a dividend, or for whom it is hard to

forecast dividends.

(More...)

28

Similar to the dividend growth model,

the free cash flow method generally

assumes that at some point in time,

the growth rate in free cash flow will

become constant.

Terminal value represents the value

of the firm at the point in which

growth becomes constant.

29

Determining the value of the firm using

the free cash flow method uses the

same procedure as the dividend

models.

The difference is that the dividend in

the models is replaced with the free

cash flow and the appropriate discount

rate is the firms cost of capital.

30

years are -$5, $10, and $20

million, after which the FCF is

expected to grow at 6%. The

overall firm cost of capital is

10%.

31

growth

FCF1 = -5.00

FCF2 = 10.00

FCF3 = 20.00

Step 2: Calculate value of stock at end of

unusual growth period using constant

growth model.

P3 =

=

= $530

.10 - .06

k s - gc

32

the amounts in steps 1 and 2. (This is

an uneven cash flow problem.)

CF0 = 0

CF1 = -5

CF2 = 10

CF3 = 20 + 530

I = 10

NPV = 416.94

33

and has 10 million shares of stock,

what is the price per share?

Value of equity = Total value Value of debt

= $416.94 $40

= $376.94 million.

Price per share = Value of equity/# of shares

= $376.94/10

= $37.69

34

Firms to Estimate Stock Price

Analysts often use the following multiples

to value stocks:

P/E

P/CF

P/Sales

Example: Based on comparable firms,

estimate the appropriate P/E. Multiply this

by expected earnings to back out an

estimate of the stock price.

35

^

P0 =

D1

.

ki g

1. ki could change:

ki = kRF + (kM kRF )bi.

kRF = k* + IP.

2. g could change due to

economic or firm situation.

36

Hypothesis?

Securities are normally in equilibrium

and are fairly priced. One cannot beat

the market except through good luck or

better information.

Weak-form EMH: Cannot profit by looking

at past trends. A recent decline is no

reason to think stocks will go up (or

down) in the future. Evidence supports

weak-form EMH, but technical

analysis is still used.

37

available information is reflected in

stock prices, so doesnt pay to pore

over annual reports looking for

undervalued stocks. Largely true, but

superior analysts can still profit by

finding and using new information.

Strong-form EMH: All information, even

inside information, is embedded in

stock prices. Not true--insiders can

gain by trading on the basis of insider

information, but thats illegal.

38

Empirical studies have been conducted to

test the three forms of efficiency. Most of

which suggest the stock market was:

Highly efficient in the weak form.

Reasonably efficient in the semistrong

form.

Not efficient in the strong form. Insiders

could and did make abnormal (and

sometimes illegal) profits.

39

Behavioral Finance

Behavioral finance incorporates

elements of cognitive psychology

to better understand how

individuals and markets respond

to different situations.

40

- Exam Fin370 W2009 b KeyUploaded bynomisy
- Engineering EconomicsUploaded bytkubvos
- FIE402N 2015 Course Package Case FullUploaded bymordi
- Becton Dickinson BDX Thesis East Coast Asset MgmtUploaded byWinston
- Anderson v. Philadelphia Warehouse Co., 111 U.S. 479 (1884)Uploaded byScribd Government Docs
- Financial Management Time Value of Money Lecture 2,3 and 4Uploaded byRameez Ramzan Ali
- Time value of moneyUploaded byHersh Oberoi
- chapter9-practiceproblemsUploaded byAnn Lorraine Mamales
- Cash Flow Measures in Corporate Analysis_Sep2012Uploaded byevanevanlin
- IndofoodUploaded byzanmatto22
- melco crown entertainment (1)Uploaded byapi-285187009
- Lesson Plan Mat112 (1)Uploaded byRia Athirah
- Financial Management NotesUploaded byAbhishek Mahipal
- YHOO Q409EarningsPresentation FinalUploaded byhblodget6728
- Corpo-SummaryUPDATED.docxUploaded byApple Ke-e
- Accounting Exam Answers 2001Uploaded byZoheb Sayani
- 2 UNIT MIRRUploaded byvijay kumar
- 2009-09-21_164631_Fin571_1Uploaded byMArk Dino Albiela
- GIS General Mills 2018 CAGNY PresentationUploaded byAla Baster
- CAIIB-SyllabusUploaded byreddy iibf
- P1 Typeset for PublicationUploaded bymavkazi
- C249 Condensed Study GuideUploaded byAnonymous yScdxi
- ch02Uploaded byPranit Mhapsekar
- (PDF, 395KB) - Return under Section 787S TCA 1997 (Income Tax due on chargeable excess in accordance with section 787R TCA 1997)Uploaded byPaul Seeber
- Bond and Equity Valuation_FinalUploaded byRishabh Agarwal
- 8053 (1)Uploaded byAchal Gupta
- 102 Session 8Uploaded byapi-3719521
- 102-106Uploaded byEunice Serneo
- ipccUploaded byRinki Lohia
- Corpo CodalUploaded byAnne Biagtan

- 64 Interview QuestionsUploaded byshivakumar N
- Production-and-Operation-Management.pdfUploaded byJasonSpring
- Production Management 15 Solved MCQS Part 1.pdfUploaded byJasonSpring
- ORGANISATIONAL-BEHAVIOUR-1.pdfUploaded byJasonSpring
- Time Value of moneyUploaded byPuneet Garg
- Financial Management & Policy by James c. Van Horne 12th editionUploaded byKashif Mirza
- OPM-301.pdfUploaded byJasonSpring
- MS-54[Management Information Systems ].pdfUploaded byJasonSpring
- MS-08[Quantitative Analysis for Managerial Applications]Uploaded byK Senthil Ram Kumar
- sa_nov09_garrett2Uploaded byPawan_Vaswani_9863
- MS-11.pdfUploaded byJasonSpring
- MS-10[Organisational Design, Development and Change].pdfUploaded byJasonSpring
- MS-01Uploaded byJasonSpring
- MS-03.pdfUploaded byJasonSpring
- STRATEGIC MANAGEMENT DMGT502_e_bookk(1).pdfUploaded byJasonSpring
- Corporate Strategy Mba Sunder LandUploaded bynovashine
- e2 Bpp Study NotesUploaded byMargaret Kayonde
- IFRS Graded Questions complete.pdfUploaded byJasonSpring
- WACCUploaded byVincent Liu
- wacc_tutorialUploaded byrahul_yadav_15
- Ungearing the BetaUploaded byJasonSpring
- Sample Gearing QuestionUploaded byJasonSpring
- Sample ExamUploaded byJasonSpring
- Problems in Cost of CapitalUploaded byJasonSpring
- CostofCapital IIUploaded byअंजनी श्रीवास्तव
- Cost of Capital 8 1024Uploaded byJasonSpring
- chap9Uploaded byJasonSpring
- CGA_Practice_Exam_FA4_Hilton.pdfUploaded byJasonSpring
- CAPMWACC.pdfUploaded byJasonSpring

- Business Economics - BBA - Sem 2 - JNUUploaded bywinall
- Entrepreneur%20Middle%20East%20June%202015.pdfUploaded byRemember TheSnow
- USA v. Bandfield Et Al Doc 3 Filed 15 Sep 14Uploaded byscion.scion
- C++ ApplicationsUploaded byAmeen Najmi
- stivaz article ethicsUploaded byshar3words
- Superhero Sunman ® - At Terminal Velocity, by Carman N. KeddyUploaded byCarman Keddy
- Araki & Kadono 2003 - Restricted Seed Contribution and Clonal Dominance in a Free-floating Aquatic Plant Utricularia Australis R. Br. in SouthwesterUploaded byMarcelo Moretto
- iPlan in TLE Grade 9_Pestañas.docUploaded byPrince Yahwe Rodriguez
- Internet AssignmentUploaded bySangeeth
- IEEE Xplore - SearchResultUploaded bySalman Khan
- Blog PostUploaded bymstockton1993
- Business Terms and ConceptsUploaded byKandimalla Satish
- RA 11032 - Ease of Doing Business and Efficient Government Service Delivery Act of 2018Uploaded byAtty. Ryan Armand Casabar
- Aromatic Solvent a 150Uploaded byFajar Lestary
- role of marketUploaded byMuhammad Shafaat Awan
- Book ReportUploaded byJolina Lucero
- DTS lesson plan.docxUploaded byKannor Mcrigor
- Chapter8_Developing_PolicyArguments.pptUploaded byDevAd Groupthree
- Airbus Safety First Magazine 12Uploaded bypedati
- jdi membersUploaded byapi-427841247
- Ball Bearing Prefixes and SuffixesUploaded bykeyur1109
- time diary phase iiUploaded byapi-384240317
- Digital Booklet - Revelation, Part 1 - The Root of LifeUploaded byChristian Campos
- dilip patel 2011Uploaded byDilip Patel
- Lean Robotics White PaperUploaded bysourabhfbd
- Principles of Microeconomics - Notes - Supply/Demand/Markets - Part 1Uploaded byKatherine Sauer
- M05740010120124040M0574-Pert 15-16 Data warehouseUploaded byiemamz
- ProgPractices.pdfUploaded byhahoangcao
- Yield measures,spot rates and forward rates= leerUploaded bymm
- G.R. Nos. 119987-88 People vs VeneracionUploaded byChase Daclan