Business Finance

(MGT 232)

Lecture 11

4-1
Stock Valuation

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 Overview of the Last Lecture

• Yield to Maturity
• Yield to Call
• Semiannual Compounding for YTM and YTC
• Current Yield

4-3
Key Differences b/w Bonds and Stocks

Points of Difference Stocks Bonds

Voice in Management Yes No

Voting Rights Yes No

Maturity Not Defined Defined

Fixed Interest
Return Dividend
Payment
Claims on Assets/ Income on
Less Preference Preference
Liquidation

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 Types of Stock

Stock

Preferred Stock Common Stock

Stock with fixed dividend Residual income with voting

but no voting rights rights & is a risky Investment
4-5
 Characteristics of Preferred Stock

Preferred Stock is a type of stock that

promises a (usually) fixed dividend, but at
the discretion of the board of directors.
•Hybrid or Quasi security
•Characteristics of both bonds and stocks

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 Characteristics of Preferred Stock

•No voting rights

•Preference over common stock in the
payment of dividends
•Preference over common stock in claims
on assets.

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 Characteristics of Common Stock

Common stock represents a residual ownership

position in the corporation.
•Voting rights (Proxy and Proxy Fight)
•Less preference in case of distribution of
income
•Less preference in case of claims on
assets.
•Dividends on the discretion of the BODs. 4-8
 Stock Valuation

Value of any asset is the present value of cash

flows expected from it
• Capital Gain
• Dividend Gain

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 Preferred Stock Valuation

Formula:
Vp = Dp / rp

P for preferred stock

Vp= Value / Price of P. Stock
Dp = Dividend on P. Stock
rp = Required rate of return on P. Stock 4-10
 Preferred Stock Valuation

Stock PS has an 8%, Rs.100 par value issue

outstanding. The appropriate discount rate
is 10%. What is the value of the preferred
stock?

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 Preferred Stock Example
• Company pays a dividend on preferred stock
at Rs. 10 per share. If the required rate of
return on P. stock is 10%

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 Common Stock Valuation

What cash flows will a shareholder receive

when owning shares of common stock?
Valuation

(1) Future dividends

(2) Future sale of the common
stock shares
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 Summary
• Key Differences in Bonds and Stocks
• Characteristics of P. Stock and C. Stock
• Stock valuation
• Preferred Stock Valuation
• Common Stock Valuation

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