FM Lecture 3 Valuation of Stock
FM Lecture 3 Valuation of Stock
FM Lecture 3 Valuation of Stock
Lecture # 3
What is Value?
Liquidation value represents the amount of money that could be realized if an asset or group of assets is sold separately from its operating organization.
Going-concern value represents the amount a firm could be sold for as a continuing operating business.
What is Value?
Book value represents either: (1) an asset: the accounting value of an asset the assets cost minus its accumulated depreciation;
(2) a firm: total assets minus liabilities and preferred stock as listed on the balance sheet.
What is Value?
Intrinsic value represents the price a security ought to have based on all factors bearing on valuation.
(1 + kP)1
=S
(1 + kP)2
(1 + kP)
t=1
DivP
(1 +
kP)t
or
DivP
(PVIFA
kP,
/ kP
Pro rata share of future earnings after all other obligations of the firm (if any remain). Dividends may be paid out of the pro rata share of earnings.
(1 + ke)1
=S
(1 + ke)2
(1 + ke)
t=1
Divt
(1 + ke)t
V=
+ ... +
(1 + ke)1 n:
(1 + ke)2
(1 + ke)n
The year in which the firms shares are expected to be sold. Pricen: The expected share price in year n.
V=
+ ... +
(1 + ke)1
D1 = (ke - g)
(1 + ke)2
D1:
(1 + ke)
g:
ke:
VZG =
+ ... +
(1 + ke)1
D1
(1 + ke)2
D1: ke:
(1 + ke)
= ke
V =S
t=1
S t=n+1
Dn(1 + g2)t
(1 + ke)
V =S
t=1
Growth of 8% to infinity!
Stock GP has two phases of growth. The first, 16%, starts at time t=0 for 3 years and is followed by 8% thereafter starting at time t=3. We should view the time line as two separate time lines in the valuation.
5 D5
6 D6
Note that we can value Phase #2 using the Constant Growth Model
4 D4
5 D5
6 D6
Note that we can now replace all dividends from year 4 to infinity with the value at time t=3, V3! Simpler!!
D4 V3 = k-g
Now we only need to find the first four dividends to calculate the necessary cash flows.
78
V = $61.22
V=S
3 D0(1 +0.16)t
D4
t (1 +0.15) t=1
(1+0.15)n (0.150.08)