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1、,Irwin/McGraw-Hill,Chapter 5,Fundamentals of Corporate Finance Third Edition,Valuing Stocks,Brealey Myers Marcus slides by Matthew Will,Irwin/McGraw-Hill,The McGraw-Hill Companies, Inc.,2001,Irwin/McGraw-Hill,Topics Covered,Stocks and the Stock Market Book Values, Liquidation Values and Market Value
2、s Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income Stocks,Stocks & Stock Market,Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by
3、 a firm that has already been through an IPO,Stocks & Stock Market,Common Stock - Ownership shares in a publicly held corporation. Secondary Market - market in which already issued securities are traded by investors. Dividend - Periodic cash distribution from the firm to the shareholders. P/E Ratio
4、- Price per share divided by earnings per share.,Stocks & Stock Market,Stocks & Stock Market,Book Value - Net worth of the firm according to the balance sheet. Liquidation Value - Net proceeds that would be realized by selling the firms assets and paying off its creditors. Market Value Balance Sheet
5、 - Financial statement that uses market value of assets and liabilities.,Valuing Common Stocks,Expected Return - The percentage yield that an investor forecasts from a specific investment over a set period of time. Sometimes called the holding period return (HPR).,Valuing Common Stocks,The formula c
6、an be broken into two parts. Dividend Yield + Capital Appreciation,Valuing Common Stocks,Dividend Discount Model - Computation of todays stock price which states that share value equals the present value of all expected future dividends. H - Time horizon for your investment.,Valuing Common Stocks,Ex
7、ample Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12% expected return?,Valuing Common Stocks,Exa
8、mple Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12% expected return?,Valuing Common Stocks,If w
9、e forecast no growth, and plan to hold out stock indefinitely, we will then value the stock as a PERPETUITY.,Assumes all earnings are paid to shareholders.,Valuing Common Stocks,Constant Growth DDM - A version of the dividend growth model in which dividends grow at a constant rate (Gordon Growth Mod
10、el). Given any combination of variables in the equation, you can solve for the unknown variable.,Valuing Common Stocks,Example What is the value of a stock that expects to pay a $3.00 dividend next year, and then increase the dividend at a rate of 8% per year, indefinitely? Assume a 12% expected ret
11、urn.,Valuing Common Stocks,Example- continued If the same stock is selling for $100 in the stock market, what might the market be assuming about the growth in dividends?,Answer The market is assuming the dividend will grow at 9% per year, indefinitely.,Valuing Common Stocks,If a firm elects to pay a
12、 lower dividend, and reinvest the funds, the stock price may increase because future dividends may be higher. Payout Ratio - Fraction of earnings paid out as dividends Plowback Ratio - Fraction of earnings retained by the firm.,Valuing Common Stocks,Growth can be derived from applying the return on
13、equity to the percentage of earnings plowed back into operations. g = return on equity X plowback ratio,Valuing Common Stocks,Example Our company forecasts to pay a $5.00 dividend next year, which represents 100% of its earnings. This will provide investors with a 12% expected return. Instead, we de
14、cide to plow back 40% of the earnings at the firms current return on equity of 20%. What is the value of the stock before and after the plowback decision?,Valuing Common Stocks,Example Our company forecasts to pay a $5.00 dividend next year, which represents 100% of its earnings. This will provide i
15、nvestors with a 12% expected return. Instead, we decide to blow back 40% of the earnings at the firms current return on equity of 20%. What is the value of the stock before and after the plowback decision?,No Growth,With Growth,Valuing Common Stocks,Example - continued If the company did not plowbac
16、k some earnings, the stock price would remain at $41.67. With the plowback, the price rose to $75.00. The difference between these two numbers (75.00-41.67=33.33) is called the Present Value of Growth Opportunities (PVGO).,Valuing Common Stocks,Present Value of Growth Opportunities (PVGO) - Net present value of a firms future investments. Sustainable Growth Rate - Steady rate at which a firm can grow: plowback ratio X
