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1、Chapter 8Chapter 8Stock ValuationStock ValuationMcGraw-Hill/IrwinCopyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Understand how stock prices depend on future dividends and dividend growth Be able to compute stock prices using the dividend growth model Un
2、derstand how corporate directors are elected Understand how stock markets work Understand how stock prices are quoted8-2Chapter Outline Common Stock Valuation Some Features of Common and Preferred Stocks The Stock Markets8-3Cash Flows for Stockholders If you buy a share of stock, you can receive cas
3、h in two waysThe company pays dividendsYou sell your shares, either to another investor in the market or back to the company As with bonds, the price of the stock is the present value of these expected cash flows 8-4One-Period Example Suppose you are thinking of purchasing the stock of Moore Oil, In
4、c. You expect it to pay a $2 dividend in one year, and you believe that you can sell the stock for $14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay? Compute the PV of the expected cash flows Price = (14 + 2) / (1.2) = $13.3
5、3 Or FV = 16; I/Y = 20; N = 1; CPT PV = -13.338-5Two-Period Example Now, what if you decide to hold the stock for two years? In addition to the dividend in one year, you expect a dividend of $2.10 in two years and a stock price of $14.70 at the end of year 2. Now how much would you be willing to pay
6、? PV = 2 / (1.2) + (2.10 + 14.70) / (1.2)2 = 13.338-6Three-Period Example Finally, what if you decide to hold the stock for three years? In addition to the dividends at the end of years 1 and 2, you expect to receive a dividend of $2.205 at the end of year 3 and the stock price is expected to be $15
7、.435. Now how much would you be willing to pay? PV = 2 / 1.2 + 2.10 / (1.2)2 + (2.205 + 15.435) / (1.2)3 = 13.338-7Developing The Model You could continue to push back the year in which you will sell the stock You would find that the price of the stock is really just the present value of all expecte
8、d future dividends So, how can we estimate all future dividend payments?8-8Estimating Dividends: Special Cases Constant dividendThe firm will pay a constant dividend foreverThis is like preferred stockThe price is computed using the perpetuity formula Constant dividend growthThe firm will increase t
9、he dividend by a constant percent every periodThe price is computed using the growing perpetuity model Supernormal growth Dividend growth is not consistent initially, but settles down to constant growth eventually The price is computed using a multistage model8-9Zero Growth If dividends are expected
10、 at regular intervals forever, then this is a perpetuity and the present value of expected future dividends can be found using the perpetuity formulaP0 = D / R Suppose stock is expected to pay a $0.50 dividend every quarter and the required return is 10% with quarterly compounding. What is the price
11、? P0 = .50 / (.1 / 4) = $208-10Dividend Growth Model Dividends are expected to grow at a constant percent per period.P0 = D1 /(1+R) + D2 /(1+R)2 + D3 /(1+R)3 + P0 = D0(1+g)/(1+R) + D0(1+g)2/(1+R)2 + D0(1+g)3/(1+R)3 + With a little algebra and some series work, this reduces to:g-RDg-Rg)1 (DP1008-11DG
12、M Example 1 Suppose Big D, Inc., just paid a dividend of $0.50 per share. It is expected to increase its dividend by 2% per year. If the market requires a return of 15% on assets of this risk, how much should the stock be selling for? P0 = .50(1+.02) / (.15 - .02) = $3.928-12DGM Example 2 Suppose TB
13、 Pirates, Inc., is expected to pay a $2 dividend in one year. If the dividend is expected to grow at 5% per year and the required return is 20%, what is the price? P0 = 2 / (.2 - .05) = $13.33 Why isnt the $2 in the numerator multiplied by (1.05) in this example?8-13Stock Price Sensitivity to Divide
14、nd Growth, gD1 = $2; R = 20%8-14Stock Price Sensitivity to Required Return, RD1 = $2; g = 5%8-15Example 8.3 Gordon Growth Company - I Gordon Growth Company is expected to pay a dividend of $4 next period, and dividends are expected to grow at 6% per year. The required return is 16%. What is the curr
15、ent price? P0 = 4 / (.16 - .06) = $40 Remember that we already have the dividend expected next year, so we dont multiply the dividend by 1+g8-16Example 8.3 Gordon Growth Company - IIWhat is the price expected to be in year 4? P4 = D4(1 + g) / (R g) = D5 / (R g) P4 = 4(1+.06)4 / (.16 - .06) = 50.50Wh
16、at is the implied return given the change in price during the four year period? 50.50 = 40(1+return)4; return = 6% PV = -40; FV = 50.50; N = 4; CPT I/Y = 6%The price is assumed to grow at the same rate as the dividends8-17Nonconstant Growth Example - I Suppose a firm is expected to increase dividend
17、s by 20% in one year and by 15% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. If the last dividend was $1 and the required return is 20%, what is the price of the stock? Remember that we have to find the PV of all expected future dividends.8-18Nonconstant G
18、rowth Example - II Compute the dividends until growth levels offD1 = 1(1.2) = $1.20D2 = 1.20(1.15) = $1.38D3 = 1.38(1.05) = $1.449 Find the expected future priceP2 = D3 / (R g) = 1.449 / (.2 - .05) = 9.66 Find the present value of the expected future cash flows P0 = 1.20 / (1.2) + (1.38 + 9.66) / (1
19、.2)2 = 8.678-19Quick Quiz Part I What is the value of a stock that is expected to pay a constant dividend of $2 per year if the required return is 15%? What if the company starts increasing dividends by 3% per year, beginning with the next dividend? The required return stays at 15%.8-20Using the DGM
20、 to Find R Start with the DGM:gPD gPg)1(D Rg-RDg - Rg)1(DP01001008-21Example: Finding the Required Return Suppose a firms stock is selling for $10.50. It just paid a $1 dividend, and dividends are expected to grow at 5% per year. What is the required return?R = 1(1.05)/10.50 + .05 = 15% What is the
21、dividend yield?1(1.05) / 10.50 = 10% What is the capital gains yield? g = 5%8-22Stock Valuation Using Multiples Another common valuation approach is to multiply a benchmark PE ratio by earnings per share (EPS) to come up with a stock price Pt = Benchmark PE ratio * EPSt The benchmark PE ratio is oft
22、en an industry average or based on a companys own historical values The price-sales ratio can also be used8-23Example: Stock Valuation Using Multiples Suppose a company had earnings per share of $3 over the past year. The industry average PE ratio is 12. Use this information to value this companys s
23、tock price. Pt = 12 x $3 = $36 per share8-24Table 8.1 - Stock Valuation Summary8-25Features of Common Stock Voting Rights Proxy voting Classes of stock Other Rights Share proportionally in declared dividends Share proportionally in remaining assets during liquidation Preemptive right first shot at n
24、ew stock issue to maintain proportional ownership if desired8-26Dividend Characteristics Dividends are not a liability of the firm until a dividend has been declared by the Board Consequently, a firm cannot go bankrupt for not declaring dividends Dividends and Taxes Dividend payments are not conside
25、red a business expense; therefore, they are not tax deductible The taxation of dividends received by individuals depends on the holding period Dividends received by corporations have a minimum 70% exclusion from taxable income8-27Features of Preferred Stock DividendsStated dividend that must be paid
26、 before dividends can be paid to common stockholdersDividends are not a liability of the firm, and preferred dividends can be deferred indefinitelyMost preferred dividends are cumulative any missed preferred dividends have to be paid before common dividends can be paid Preferred stock generally does
27、 not carry voting rights8-28Stock Market Dealers vs. Brokers New York Stock Exchange (NYSE) Largest stock market in the world License holders (1,366) Commission brokers Specialists Floor brokers Floor traders Operations Floor activity8-29NASDAQ Not a physical exchange computer-based quotation system
28、 Multiple market makers Electronic Communications Networks Three levels of informationLevel 1 median quotes, registered representativesLevel 2 view quotes, brokers & dealersLevel 3 view and update quotes, dealers only Large portion of technology stocks8-30Work the Web Example Electronic Communicatio
29、ns Networks provide trading in NASDAQ securities Click on the web surfer and visit Instinet8-31 What information is provided in the stock quote? Click on the web surfer to go to Bloomberg for current stock quotes.Reading Stock Quotes8-32Quick Quiz Part II You observe a stock price of $18.75. You exp
30、ect a dividend growth rate of 5%, and the most recent dividend was $1.50. What is the required return? What are some of the major characteristics of common stock? What are some of the major characteristics of preferred stock?8-33Ethics Issues The status of pension funding (i.e., over- vs. under-fund
31、ed) depends heavily on the choice of a discount rate. When actuaries are choosing the appropriate rate, should they give greater priority to future pension recipients, management, or shareholders? How has the increasing availability and use of the internet impacted the ability of stock traders to ac
32、t unethically?8-34Comprehensive Problem XYZ stock currently sells for $50 per share. The next expected annual dividend is $2, and the growth rate is 6%. What is the expected rate of return on this stock? If the required rate of return on this stock were 12%, what would the stock price be, and what would the dividend yield be?8-35End of Chapter8-36