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Brigham ch9 Stock Edited 97 2003
Brigham ch9 Stock Edited 97 2003
Represents ownership.
Ownership implies control.
Stockholders elect directors.
Directors elect management.
Management’s goal: Maximize the
stock price.
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9-3
Social/Ethical Question
100%
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50%
25%
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D1 D2 D3 D
P 0 . . . .
1 k s
1
1 k s
2
1 k s
3
1 k s
D1 = D0(1 + g)1
D2 = D0(1 + g)2 = D1(1+g)1
Dt = D0(1 + g)t
If g is constant, then:
^ D0(1 + g) D1
P0 = =
ks – g ks – g
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9 - 22
$
D t D0 1 g
t
Dt
PVD t
1 k
0.25 t
P0 PVD t If g > k, P0 !
0 Years (t)
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9 - 23
D1
P̂0 = requires ks > g
ks – g
0 g = 6% 1 2 3
$2.12 D1
Dividend yld = = = 7.0%
P0 $30.29
^
P 1 – P0 $32.10 – $30.29
Cap gains yld = =
P0 $30.29
= 6.0%
Total return = 7.0% + 6.0% = 13.0%
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9 - 29
D D
P0 g
1 1
to k
k s – g s
P0
^
Then, ks = $2.12/$30.29 + 0.06
= 0.07 + 0.06 = 13%
^ PMT $2.00
P0 = = = $15.38
k 0.13
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9 - 31
$2.60
Div. yield0 = = 4.81%.
$54.11
0 1 2 3 4
ks=13%
...
g = 0% g = 0% g = 0% g = 6%
2.00 2.00 2.00 2.00 2.12
1.77
1.57
1.39 2.12
20.99 P3 30.29.
25.72 0.07
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9 - 38
D1 $2.00
t = 0: = = 7.78% (D/P=div yield)
P0 $25.72
D 1 D
0 1 +g
P0 = =
g
ks – g
ks –
$2.00(0.94) $1.88
= = = $9.89.
0.13 – (-0.06) 0.19
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9 - 41
Further Example of Supernormal Growth
Stock
Time 0 1 2 3 4 5 6 ...
Div($) 0.75 0.938 1.172 1.465 1.831 1.923 2.019 …
g(%) 25% 25% 25% 25% 5% 5% 5% …
ii) Find the stock price at a future time, a point after which the dividend growth rate has
become constant forever. That point is at year 5, thus:
iii) Compute the PVs of all the future expected cash dividends found in step (i)
and add to the PV of the expected future sale price (P 5) calculated in step (ii):
cont…
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9 - 45
(ii) D5 is where the growth rate in dividends is expected to
become constant forever and is the earliest point that
satisfies the constant-growth assumption. With D5 =$1.96,
g=3%, and r = 12%,
P0 = 1.00/1.121
+ 1.00/1.122
+ 1.00/1.123
+1.40/1.124
+ 1.96/1.125
+ (1+0.03)1.96/{(1.12)5(0.12-0.03)}
= $17.13
Cont..
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9 - 50
0 1 2 3 4
k = 10%
...
g = 6%
-5 10 20 21.20
-4.545
8.264
15.026 21.20
398.197 $530 = 0.04 = *TV3
$416.942
*TV3 represents the terminal value of
the firm, at t = 3
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9 - 52
^
ks = (D1/P0) + g = ks = kRF + (kM – kRF)βfirm
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9 - 55
^ D1
P0 = .
ki – g
1. ki could change:
ki = kRF + (kM – kRF )bi.
kRF = k* + IP.
1. Weak-form EMH:
Can’t 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.
2. Semistrong-form EMH:
All publicly available
information is reflected in
stock prices, so doesn’t pay to
pore over annual reports
looking for undervalued
stocks. Largely true, but
superior analysts can still
profit by finding and using new
information.
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9 - 61
3. 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 that’s
illegal.
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.
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9 - 64
What’s the expected return of
preferred stock with Vp = $50 and
annual dividend = $5?
$5
Vp $50 .
kp
$5
k̂ p 0.10 10.0%.
$50