Scribd Logo
Upload

Welcome to Scribd!

  • 30 views

    Stock Valuation

    Uploaded by

    Ashek AHmed
    1. Preferred stock is a type of stock that promises a fixed dividend payment but the board has discretion over dividend payments. It has preference over common stock for dividend payments and claims on assets. 2. The value of preferred stock can be calculated as the expected annual dividend payment divided by the discount rate. 3. Common stock valuation considers future earnings and dividend payments. Dividend growth can be modeled as constant, zero, or multi-phase over time.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Stock Valuation

    Uploaded by

    Ashek AHmed
    30 views21 pages
    1. Preferred stock is a type of stock that promises a fixed dividend payment but the board has discretion over dividend payments. It has preference over common stock for dividend payments and claims on assets. 2. The value of preferred stock can be calculated as the expected annual dividend payment divided by the discount rate. 3. Common stock valuation considers future earnings and dividend payments. Dividend growth can be modeled as constant, zero, or multi-phase over time.

    Original Description:

    Original Title

    stock_Valuation

    Copyright

    © © All Rights Reserved

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    1. Preferred stock is a type of stock that promises a fixed dividend payment but the board has discretion over dividend payments. It has preference over common stock for dividend payments and claims on assets. 2. The value of preferred stock can be calculated as the expected annual dividend payment divided by the discount rate. 3. Common stock valuation considers future earnings and dividend payments. Dividend growth can be modeled as constant, zero, or multi-phase over time.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    30 views21 pages

    Stock Valuation

    Uploaded by

    Ashek AHmed
    1. Preferred stock is a type of stock that promises a fixed dividend payment but the board has discretion over dividend payments. It has preference over common stock for dividend payments and claims on assets. 2. The value of preferred stock can be calculated as the expected annual dividend payment divided by the discount rate. 3. Common stock valuation considers future earnings and dividend payments. Dividend growth can be modeled as constant, zero, or multi-phase over time.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 21

    Chapter 4 (2)

    The
    The Valuation
    Valuation of
    of
    Stocks
    Stocks

    1
    Preferred
    Preferred Stock
    Stock Valuation
    Valuation
    Preferred Stock is a type of stock
    that promises a (usually) fixed
    dividend, but at the discretion of
    the board of directors.
    Preferred Stock has preference over
    common stock in the payment of
    dividends and claims on assets.
    2
    Preferred
    Preferred Stock
    Stock Valuation
    Valuation
    DivP DivP DivP
    V= (1 + kP) 1
    + (1 + kP)
    2
    + ... + (1 + kP)

     DivP
    = or DivP(PVIFA k )
    t=1 (1 + kP) t
    P, 

    This reduces to a perpetuity!


    perpetuity
    V = DivP / kP
    3
    Preferred
    Preferred Stock
    Stock Example
    Example
    Stock PS has an 8%, $100 par value
    issue outstanding. The appropriate
    discount rate is 10%. What is the value
    of the preferred stock?
    stock
    DivP = $100 ( 8% ) = $8.00.
    $8.00
    kP = 10%.
    10%
    V = DivP / kP = $8.00 / 10%
    = $80

    4
    Common
    Common Stock
    Stock Valuation
    Valuation
    Common stock represents a
    residual ownership position in the
    corporation.
     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.
    5
    Dividend
    Dividend Growth
    Growth
    Pattern
    Pattern Assumptions
    Assumptions
    The dividend valuation model requires the
    forecast of all future dividends. The
    following dividend growth rate assumptions
    simplify the valuation process.
    Constant Growth
    No Growth
    Growth Phases
    6
    Constant
    Constant Growth
    Growth Model
    Model
    The constant growth model assumes that
    dividends will grow forever at the rate g.

    D0(1+g) D0(1+g)2 D0(1+g)


    V = (1 + k )1 + (1 + k )2 + ... + (1 + k ) 
    e e e

    D1: Dividend paid at time 1.


    D1
    = g: The constant growth rate.
    (ke - g) ke: Investor’s required return.
    7
    Constant
    Constant Growth
    Growth
    Model
    Model Example
    Example
    Stock CG has an expected dividend
    growth rate of 8%. Each share of stock
    just received an annual $3.24 dividend.
    The appropriate discount rate is 15%.
    What is the value of the common stock?
    stock
    D1 = $3.24 ( 1 + .08 ) = $3.50

    VCG = D1 / ( ke - g ) = $3.50 / ( .15 - .08 )


    = $50
    8
    Zero
    Zero Growth
    Growth Model
    Model
    The zero growth model assumes that
    dividends will grow forever at the rate g = 0.

    D1 D2 D
    VZG = + + ... +

    (1 + ke)1 (1 + ke)2 (1 + ke)

    D1 D1: Dividend paid at time 1.


    =
    ke ke: Investor’s required return.
    9
    Zero
    Zero Growth
    Growth
    Model
    Model Example
    Example
    Stock ZG has an expected growth rate of
    0%. Each share of stock just received an
    annual $3.24 dividend per share. The
    appropriate discount rate is 15%. What
    is the value of the common stock?
    stock

    D1 = $3.24 ( 1 + 0 ) = $3.24

    VZG = D1 / ( ke - 0 ) = $3.24 / ( .15 - 0 )


    = $21.60
    10
    Growth
    Growth Phases
    Phases Model
    Model
    The growth phases model assumes
    that dividends for each share will grow
    at two or more different growth rates.

    n D0(1+g1) t  Dn(1+g2)t
    V = +  (1 + ke)t
    t=1 (1 + ke)
    t
    t=n+1
    11
    Growth
    Growth Phases
    Phases Model
    Model
    Note that the second phase of the growth
    phases model assumes that dividends will
    grow at a constant rate g2. We can rewrite
    the formula as:

    n D0(1+g1)t 1 Dn+1
    V = +
    (1 + ke)n (ke - g2)
    t=1 (1 + ke)t
    12
    Growth
    Growth Phases
    Phases
    Model
    Model Example
    Example
    Stock GP has an expected growth
    rate of 16% for the first 3 years and
    8% thereafter. Each share of stock
    just received an annual $3.24
    dividend per share. The appropriate
    discount rate is 15%. What is the
    value of the common stock under
    this scenario?
    13
    Growth
    Growth Phases
    Phases
    Model
    Model Example
    Example
    0 1 2 3 4 5 6

    D1 D2 D3 D4 D5 D6

    Growth of 16% for 3 years 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.

    14
    Growth
    Growth Phases
    Phases
    Model
    Model Example
    Example
    0 1 2 3 Growth Phase
    #1 plus the infinitely
    long Phase #2
    D1 D2 D3
    0 1 2 3 4 5 6

    D4 D5 D6
    Note that we can value Phase #2 using the
    Constant Growth Model
    15
    Growth
    Growth Phases
    Phases
    Model
    Model Example
    Example

    V3 = D 4
    We can use this model because
    dividends grow at a constant 8%
    k-g rate beginning at the end of Year 3.

    0 1 2 3 4 5 6

    D4 D5 D6
    Note that we can now replace all dividends from year
    4 to infinity with the value at time t=3, V3! Simpler!!

    16
    Growth
    Growth Phases
    Phases
    Model
    Model Example
    Example
    0 1 2 3
    New Time
    Line
    D1 D2 D3
    0 1 2 3 D4
    Where V3 =
    V3 k-g
    Now we only need to find the first four dividends
    to calculate the necessary cash flows.
    17
    Growth
    Growth Phases
    Phases
    Model
    Model Example
    Example
    Determine the annual dividends.
    D0 = $3.24 (this has been paid already)
    D1 = D0(1+g1)1 = $3.24(1.16)1 =$3.76
    D2 = D0(1+g1)2 = $3.24(1.16)2 =$4.36
    D3 = D0(1+g1)3 = $3.24(1.16)3 =$5.06
    D4 = D3(1+g2)1 = $5.06(1.08)1 =$5.46
    18
    Growth
    Growth Phases
    Phases
    Model
    Model Example
    Example
    0 1 2 3
    Actual
    Values
    3.76 4.36 5.06
    0 1 2 3 5.46
    Where $78 =
    .15-.08
    78
    Now we need to find the present value
    of the cash flows.

    19
    Growth
    Growth Phases
    Phases
    Model
    Model Example
    Example
    We determine the PV of cash flows.
    PV(D1) = D1(PVIF15%, 1) = $3.76 (.870) = $3.27
    PV(D2) = D2(PVIF15%, 2) = $4.36 (.756) = $3.30
    PV(D3) = D3(PVIF15%, 3) = $5.06 (.658) = $3.33
    P3 = $5.46 / (.15 - .08) = $78 [CG Model]
    PV(P3) = P3(PVIF15%, 3) = $78 (.658) = $51.32
    20
    Growth
    Growth Phases
    Phases
    Model
    Model Example
    Example
    Finally, we calculate the intrinsic value by
    summing all of cash flow present values.

    V = $3.27 + $3.30 + $3.33 + $51.32


    V = $61.22
    3 D (1+.16)t 1 D4
    V=
    0
    +
    t=1 (1 + .15)t (1+.15)n (.15-.08)
    21

    You might also like