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1、The McGraw-Hill Companies,Inc.,20015-1Irwin/McGraw-HillIrwin/McGraw-HillChapter 5Fundamentals of Corporate FinanceThird EditionValuing StocksBrealey Myers Marcusslides by Matthew WillIrwin/McGraw-HillThe McGraw-Hill Companies,Inc.,2001The McGraw-Hill Companies,Inc.,20015-2Irwin/McGraw-HillIrwin/McGr
2、aw-HillTopics CoveredStocks and the Stock MarketBook Values,Liquidation Values and Market ValuesValuing Common StocksSimplifying the Dividend Discount ModelGrowth Stocks and Income StocksThe McGraw-Hill Companies,Inc.,20015-3Irwin/McGraw-HillStocks&Stock MarketPrimary Market-Place where the sale of
3、new stock first occurs.Initial Public Offering(IPO)-First offering of stock to the general public.Seasoned Issue-Sale of new shares by a firm that has already been through an IPOThe McGraw-Hill Companies,Inc.,20015-4Irwin/McGraw-HillStocks&Stock MarketCommon Stock-Ownership shares in a publicly held
4、 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-Price per share divided by earnings per share.The McGraw-Hill Companies,Inc.,20015-5Irwin/McGraw-HillStocks&Stock MarketThe
5、McGraw-Hill Companies,Inc.,20015-6Irwin/McGraw-HillStocks&Stock MarketBook 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-Financial statement that use
6、s market value of assets and liabilities.The McGraw-Hill Companies,Inc.,20015-7Irwin/McGraw-HillValuing Common StocksExpected 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).The McGraw-Hill Co
7、mpanies,Inc.,20015-8Irwin/McGraw-HillValuing Common StocksThe formula can be broken into two parts.Dividend Yield +Capital Appreciation The McGraw-Hill Companies,Inc.,20015-9Irwin/McGraw-HillValuing Common StocksDividend Discount Model-Computation of todays stock price which states that share value
8、equals the present value of all expected future dividends.H-Time horizon for your investment.The McGraw-Hill Companies,Inc.,20015-10Irwin/McGraw-HillValuing Common StocksExampleCurrent forecasts are for XYZ Company to pay dividends of$3,$3.24,and$3.50 over the next three years,respectively.At the en
9、d 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?The McGraw-Hill Companies,Inc.,20015-11Irwin/McGraw-HillValuing Common StocksExampleCurrent forecasts are for XYZ Company to pay dividends of$3,$3.24,and$3.50 over
10、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?The McGraw-Hill Companies,Inc.,20015-12Irwin/McGraw-HillValuing Common StocksIf we forecast no growth,and plan to hold ou
11、t stock indefinitely,we will then value the stock as a PERPETUITY.Assumes all earnings are paid to shareholders.The McGraw-Hill Companies,Inc.,20015-13Irwin/McGraw-HillValuing Common StocksConstant Growth DDM-A version of the dividend growth model in which dividends grow at a constant rate(Gordon Gr
12、owth Model).Given any combination of variables in the equation,you can solve for the unknown variable.The McGraw-Hill Companies,Inc.,20015-14Irwin/McGraw-HillValuing Common StocksExampleWhat is the value of a stock that expects to pay a$3.00 dividend next year,and then increase the dividend at a rat
13、e of 8%per year,indefinitely?Assume a 12%expected return.The McGraw-Hill Companies,Inc.,20015-15Irwin/McGraw-HillValuing Common StocksExample-continuedIf the same stock is selling for$100 in the stock market,what might the market be assuming about the growth in dividends?AnswerThe market is assuming
14、 the dividend will grow at 9%per year,indefinitely.The McGraw-Hill Companies,Inc.,20015-16Irwin/McGraw-HillValuing Common StocksIf a firm elects to pay a lower dividend,and reinvest the funds,the stock price may increase because future dividends may be higher.Payout Ratio-Fraction of earnings paid o
15、ut as dividendsPlowback Ratio-Fraction of earnings retained by the firm.The McGraw-Hill Companies,Inc.,20015-17Irwin/McGraw-HillValuing Common StocksGrowth can be derived from applying the return on equity to the percentage of earnings plowed back into operations.g=return on equity X plowback ratioT
16、he McGraw-Hill Companies,Inc.,20015-18Irwin/McGraw-HillValuing Common StocksExampleOur 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 decide to plow back 40%of the earnings at the firms current
17、return on equity of 20%.What is the value of the stock before and after the plowback decision?The McGraw-Hill Companies,Inc.,20015-19Irwin/McGraw-HillValuing Common StocksExampleOur company forecasts to pay a$5.00 dividend next year,which represents 100%of its earnings.This will provide investors wi
18、th 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 GrowthWith GrowthThe McGraw-Hill Companies,Inc.,20015-20Irwin/McGraw-HillValuing Common StocksExample-contin
19、uedIf the company did not plowback 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).The McGraw-Hill Companies,Inc.,20015-21Irwin/McGraw-Hi
20、llValuing Common StocksPresent 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 return on equity.The McGraw-Hill Companies,Inc.,20015-22Irwin/McGraw-HillWeb ResourcesClick to access web sitesClick to access web sitesInternet connection requiredInternet connection required