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1、8-1Stock ValuationStock ValuationChapter 8Chapter 8Copyright 2013 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin8-2Chapter OutlineChapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Markets8-3Chapter Outl
2、ineChapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Markets8-4Bonds and Stocks:SimilaritiesBonds and Stocks:SimilaritiesBoth provide long-term funding for the organizationBoth are future funds that an investor must considerBo
3、th have future periodic paymentsBoth can be purchased in a marketplace at a price“today”8-5Bonds and Stocks:DifferencesBonds and Stocks:DifferencesFrom the firms perspective:a bond is a long-term debt and stock is equityFrom the firms perspective:a bond gets paid off at the maturity date;stock conti
4、nues indefinitely.We will discuss the mix of bonds(debt)and stock(equity)in a future chapter entitled capital structure8-6Bonds and Stocks:DifferencesBonds and Stocks:DifferencesA bond has coupon payments and a lump-sum payment;stock has dividend payments foreverCoupon payments are fixed;stock divid
5、ends change or“grow”over time8-7A visual representation of a bond with a coupon payment(C)and a maturity value(M)12345$C1$C2$C3$C4$C5$M8-8A visual representation of a share of common stock with dividends(D)forever12345$D1$D2$D3$D4$D5$D8-9Comparison ValuationsComparison Valuations123BondCCCMP00123Com
6、mon StockD1D2D3DP008-10Notice these differences:The“Cs”are constant and equalThe bond ends(year 5 here)There is a lump sum at the end12345$C1$C2$C3$C4$C5$M8-11Notice these differences:The dividends are differentThe stock never endsThere is no lump sum12345$D1$D2$D3$D4$D5$D8-12Chapter OutlineChapter
7、OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Markets8-13Our Task:Our Task:To value a share of To value a share of Common StockCommon Stock8-14And how will we And how will we accomplish our accomplish our task?task?8-15BringAllExp
8、ectedFutureEarningsIntoPresentValueTerms8-16BAEFEIPVTJust remember:Just remember:8-17Cash Flows for StockholdersCash Flows for StockholdersIf you buy a share of stock,you can receive cash in two ways:1.The company pays dividends2.You sell your shares,either to another investor in the market or back
9、to the company8-18One-Period ExampleOne-Period ExampleReceiving one future dividend and one future selling price of a share of common stock8-19One-Period ExampleOne-Period ExampleSuppose you are thinking of purchasing the stock of Moore Oil,Inc.You expect it to pay a$2 dividend in one year,and you b
10、elieve 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?8-20Visually this would look like:1D1=$2P1=$14R=20%8-21Compute the Present ValueCompute the Present Value1D1=$2P1=$14R=20%$1.67$11.67PV=$13
11、.341 year=N20%=Discount rate$2=Payment(PMT)$14=FVPV=?-13.341st2ndTI BA II PlusTI BA II Plus8-228-228-23$14=FV1 year=N$2=Payment(PMT)20%=Discount rate PV=?-13.34HP 12-CHP 12-C8-24Two Period ExampleTwo Period ExampleNow,what if you decide to hold the stock for two years?In addition to the dividend in
12、one year,you expect a dividend of$2.10 in two years and a stock price of$14.70 at the end of year.Now how much would you be willing to pay?8-25Visually this would look like:2D1=$2P2=$14.70R=20%1D2=$2.108-26Compute the Present ValueCompute the Present Value2D1=$2P2=$14.70R=20%1D2=$2.10$1.67$1.46$10.2
13、1$13.34=P08-27What is the Observed Pattern?What is the Observed Pattern?We value a share of stock by bring back all expected future dividends into present value terms8-28Future DividendsFuture DividendsSo the key is to determine the future dividends when given the growth rate of those dividends,whet
14、her the growth is zero,constant,or unusual first and then levels off to a constant growth rate.8-29So how do you compute the So how do you compute the future dividends?future dividends?Three scenarios:1.A constant dividend(zero growth)2.The dividends change by a constant growth rate3.We have some un
15、usual growth periods and then level off to a constant growth rate8-30So how do you compute the So how do you compute the future dividends?future dividends?Three scenarios:1.A constant dividend(zero growth)2.The dividends change by a constant growth rate3.We have some unusual growth periods and then
16、level off to a constant growth rate8-311.Constant Dividend 1.Constant Dividend Zero GrowthZero GrowthThe firm will pay a constant dividend foreverThis is like preferred stockThe price is computed using the perpetuity formula:P0=D/R8-32So how do you compute the So how do you compute the future divide
17、nds?future dividends?Three scenarios:1.A constant dividend(zero growth)2.The dividends change by a constant growth rate3.We have some unusual growth periods and then level off to a constant growth rate8-332.2.Constant Growth Rate Constant Growth Rate of of DividendsDividendsDividends are expected to
18、 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+8-342.2.Constant Growth Rate Constant Growth Rate of of DividendsDividendsWith a little algebra this reduces to:8-352.2.Constant Growth Rate Constant Growth Rate of of DividendsDiv
19、idendsStudent caution:A.What happens if g R?B.What happens if g=R?8-36Dividend Growth Model Dividend Growth Model(DGM)Assumptions(DGM)AssumptionsTo use the Dividend Growth Model(aka the Gordon Model),you must meet all three requirements:1.The growth of all future dividends must be constant,2.The gro
20、wth rate must be smaller than the discount rate(g R),and3.The growth rate must not be equal to the discount rate (g R)8-37DGM Example 1DGM Example 1Suppose Big D,Inc.,just paid a dividend(D0)of$0.50 per share.It is expected to increase its dividend by 2%per year.If the market requires a return of 15
21、%on assets of this risk,how much should the stock be selling for?8-38DGM Example 1 SolutionDGM Example 1 SolutionP0=.50(1+.02).15 -.02P0=.51 .13=$3.928-39DGM Example 2DGM Example 2Suppose Moore Oil Inc.,is expected to pay a$2 dividend in one year.If the dividend is expected to grow at 5%per year and
22、 the required return is 20%,what is the price?8-40DGM Example 2 SolutionDGM Example 2 SolutionP0=2.00 .20 -.05P0=2.00 .15=$13.348-41So how do you compute the So how do you compute the future dividends?future dividends?Three scenarios:1.A constant dividend(zero growth)2.The dividends change by a cons
23、tant growth rate3.We have some unusual growth periods and then level off to a constant growth rate8-423.3.Unusual Growth;Unusual Growth;Then Constant GrowthThen Constant GrowthJust draw the time line with the unusual growth rates identified and determine if/when you can use the Dividend Growth Model
24、.Deal with the unusual growth dividends separately.8-43Non-constant Growth Non-constant Growth Problem StatementProblem StatementSuppose a firm is expected to increase dividends by 20%in one year and by 15%for two years.After that,dividends will increase at a rate of 5%per year indefinitely.If the l
25、ast dividend was$1 and the required return is 20%,what is the price of the stock?8-44Non-constant Growth Non-constant Growth Problem StatementProblem StatementDraw the time line and compute each dividend using the corresponding growth rate:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D38-45Non-constant Growth
26、 Non-constant Growth Problem StatementProblem StatementDraw the time line and compute each dividend using the corresponding growth rate:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3D1=($1.00)(1+20%)=$1.00 x 1.20=$1.20=1.208-46Non-constant Growth Non-constant Growth Problem StatementProblem StatementDraw the
27、 time line and compute each dividend using the corresponding growth rate:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3D2=($1.20)(1+15%)=$1.20 x 1.15=$1.38=1.388-47Non-constant Growth Non-constant Growth Problem StatementProblem StatementDraw the time line and compute each dividend using the corresponding gr
28、owth rate:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3D3=($1.38)(1+15%)=$1.38 x 1.15=$1.59=1.598-48Non-constant Growth Non-constant Growth Problem StatementProblem StatementNow we can use the DGM starting with the period of the constant growth rate at our time frame of year 3:g=20%g=15%g=15%g=5%D0=$1.00123
29、4D1D2D3P3=D4/R g P3=D3(1+g)/R-gR=20%8-49Non-constant Growth Non-constant Growth Problem StatementProblem StatementNow we can use the DGM starting with the period of the constant growth rate at our time frame of year 3:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3 P3=D3(1+g)/R-gP3=1.59(1.05)/.20-.05=$11.13R=
30、20%8-50Non-constant Growth Non-constant Growth Problem StatementProblem StatementWe now have all of the dividends accounted for and we can compute the present value for a share of common stock:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3R=20%1.20 1.38 1.59P3=11.138-51Non-constant Growth Non-constant Growth
31、 Problem StatementProblem StatementBAEFEIPVT!g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3R=20%1.20 1.38 1.59P3=11.13$9.328-52Stock Price Sensitivity to Stock Price Sensitivity to Dividend Growth,gDividend Growth,gD1=$2;R=20%05010015020025000.050.10.150.2Growth RateStock PriceStock Price Sensitivity to Stoc
32、k Price Sensitivity to Required Return,RRequired Return,RD1=$2;g=5%05010015020025000.050.10.150.20.250.3Growth RateStock Price8-538-54Using the DGM to Find RUsing the DGM to Find RStart with the DGM and then algebraically rearrange the equation to solve for R:8-55Finding the Required Return-Finding
33、the Required Return-ExampleExampleSuppose 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 dividend yield?1(1.05)/10.50=10%What is the capital gains yield?g=5%8-56Stock Valuati
34、on AlternativeStock Valuation AlternativeBut my company doesnt pay dividends!How can I value the stock?8-57Valuation Using MultiplesValuation Using MultiplesWe can use the PE ratio and/or the price-sales ratio:Pt=Benchmark PE ratio X EPStPt=Benchmark price-sales ratio X Sales per sharet8-58Stock Val
35、uation SummaryStock Valuation Summary8-59Chapter OutlineChapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Markets8-60Features of Common StockFeatures of Common StockVoting RightsProxy votingClasses of stock8-61Features of Comm
36、on StockFeatures of Common StockOther RightsShare proportionally in declared dividendsShare proportionally in remaining assets during liquidationPreemptive right first shot at new stock issue to maintain proportional ownership if desired8-62Dividend CharacteristicsDividend CharacteristicsDividends a
37、re not a liability of the firm until a dividend has been declared by the BoardConsequently,a firm cannot go bankrupt for not declaring dividends8-63Dividend CharacteristicsDividend CharacteristicsDividends and TaxesDividend payments are not considered a business expense;therefore,they are not tax de
38、ductibleThe taxation of dividends received by individuals depends on the holding periodDividends received by corporations have a minimum 70%exclusion from taxable income8-64Chapter OutlineChapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred Sto
39、ckThe Stock Markets8-65Features of Preferred StockFeatures of Preferred StockDividendsStated dividend that must be paid before dividends can be paid to common stockholdersDividends are not a liability of the firm,and preferred dividends can be deferred indefinitely8-66Features of Preferred StockFeat
40、ures of Preferred StockDividendsMost preferred dividends are cumulative any missed preferred dividends have to be paid before common dividends can be paid8-67Features of Preferred StockFeatures of Preferred StockPreferred stock generally does not carry voting rights8-68Chapter OutlineChapter Outline
41、Bond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Markets8-69Stock Market,Dealers vs.BrokersStock Market,Dealers vs.BrokersDealer:trades with inventory for bid and ask pricesBroker:matches buyers and sellers for a fee8-70Stock MarketStock Ma
42、rketNew York Stock Exchange(NYSE)Largest stock market in the worldLicense holders(1,366)Commission brokersSpecialistsFloor brokersFloor tradersOperationsFloor activity8-71NASDAQNASDAQNot a physical exchange it is a computer-based quotation systemMultiple market makersElectronic Communications Networ
43、ks8-72NASDAQNASDAQThree levels of information:Level 1 median quotes,registered representativesLevel 2 view quotes,brokers&dealersLevel 3 view and update quotes,dealers onlyA large portion of technology stocks are bought and sold each day on NASDAQ8-73Work the WebWork the WebElectronic Communications
44、 Networks provide trading in NASDAQ securitiesClick on the web surfer and visit Instinet8-74Reading Stock QuotesReading Stock Quotes8-75Work the WebWork the WebClick on the web surfer to go to Bloomberg for current stock quotes.8-76Ethics IssuesEthics IssuesThe status of pension funding(i.e.,over-vs
45、.under-funded)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
46、to act unethically?8-77Quick QuizQuick QuizWhat 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%.8-78Comprehe
47、nsive ProblemComprehensive ProblemXYZ 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 divid
48、end yield be?8-79TerminologyTerminologyBonds versus Common StockCash DividendsCapital Gain Yield&Dividend YieldDividend Growth Model(DGM)Preferred StockStock Market NYSE Electronic Exchange NASDAQStock Quotes8-80FormulasFormulasP0=D RValue of a Perpetuity:Value of a Share of Common Stock using the D
49、GM:8-81FormulasFormulasValue of a Share of Common Stock using MultiplesPt=Benchmark PE ratio X EPStPt=Benchmark price-sales ratio X Sales per sharet8-82Key Concepts and SkillsKey Concepts and SkillsCompute the future dividend stream based on dividend growthUse the Dividend Growth Model(DGM)to determ
50、ine the price of stockExplain how stock markets workDescribe the workings of a stock exchange8-831.A stocks value is the present value of all expected future earnings.2.Computing the future dividends of a stock is the key to understanding its value3.Issuing stock provides the firm long-term fundingW