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1、CHAPTER 9Stocks and Their ValuationnFeatures of mon stocknDetermining mon stock valuesnEfficient marketsnPreferred stocknRepresents ownership.nOwnership implies control.nStockholders elect directors.nDirectors elect management.nManagements goal:Maximize stock price.Facts about mon StockSocial/Ethica
2、l QuestionShould management be equally concerned about employees,customers,suppliers,“the public,or just the stockholders?In enterprise economy,work for stockholders subject to constraints environmental,fair hiring,etc.and petition.nClassified stock has special provisions.nCould classify existing st
3、ock as founders shares,with voting rights but dividend restrictions.nNew shares might be called“Class A shares,with voting restrictions but full dividend rights.Whats classified stock?How might classified stock be used?When is a stock sale an initial public offering IPO?A firm“goes public through an
4、 IPO when the stock is first offered to the public.Average Initial Returns on IPOs in Various CountriesMalaysia100%75%50%25%BrazilPortugalJapanSwedenUnited StatesCanadanDividend growth modelnFree cash flow methodnUsing the multiples of parable firmsDifferent Approaches for Valuing mon StockOne whose
5、 dividends are expected togrow forever at a constant rate,g.Stock Value=PV of DividendsWhat is a constant growth stock?For a Constant Growth StockD1=D01+g 1D2=D01+g 2Dt=Dt1+g tP0=.If g is constant,then:D01+g ks-gD1ks-g$0.25Years t 0What happens if g ks?nIf ks g and 2 g is expected to be constant for
6、ever.Assume beta=1.2,kRF=7%,and kM=12%.What is the required rate of return on the firms stock?ks=kRF+kM kRFbFirm=7%+12%7%1.2=13%.Use the SML to calculate ks:D0 was$2.00 and g is a constant 6%.Find the expected dividends for the next 3 years,and their PVs.ks=13%.0 12.24722.3823g=6%1.87611.7599D0=2.00
7、1.650913%2.12=Whats the stocks market value?D0=2.00,ks=13%,g=6%.Constant growth model:P0=D1ks g 0.13 0.06$2.12$2.120.07$30.29.nD1 will have been paid,so expected dividends are D2,D3,D4 and so on.Thus,Could also find P1 as follows:ks g 0.13 0.06 P1=What is the stocks market value one year from now,P1
8、?D2$2.247=$32.10.P1=P01.06=$32.10.Find the expected dividend yield,capital gains yield,and total return during the first year.Dividend yld=Cap gains yld=Total return=7.0%+6.0%=13.0%.D1P0P1 P0P0$30.29$2.12 7.0%.$32.10$30.29$30.29=6.0%.Rearrange model to rate of return form:$.PDk gDPgs01 10=-=+to ksTh
9、en,ks=$2.12/$30.29+0.06=0.07+0.06=13%.P0=$15.38.What would P0 be if g=0?The dividend stream would be a perpetuity.2.00 2.00 2.000 1 2 313%.PMTk$2.000.13nCan no longer use constant growth model.nHowever,growth be es constant after 3 years.If we have supernormal growth of 30%for 3 years,then a long-ru
10、n constant g=6%,what is P0?k is still 13%.Nonconstant growth followed by constantgrowth:02.3012.6473.04546.1161 2 3 4ks=13%54.109=P0g=30%g=30%g=30%g=6%D0=2.00 2.600 3.380 4.394 4.658$.$66.54 P34.65813 0 06=-=0.What is the expected dividend yield and capital gains yield at t=0?At t=4?Div.yield0=4.81%
11、.Cap.gain0=13.00%4.81%=8.19%.$2.60$54.11nDuring nonconstant growth,D/P and capital gains yield are not constant,and capital gains yield is less than g.nAfter t=3,g=constant=6%=capital gains yield;k=13%;so D/P=13%6%=7%.25.72Suppose g=0 for t=1 to 3,and then g is a constant 6%.What is P0?01.771.571.39
12、20.991 2 3 4ks=13%g=0%g=0%g=0%g=6%2.00 2.00 2.00 2.00 2.12.$P32.120 0730.29.=.t=3:Now have constant growth with g=capital gains yield=6%and D/P=7%.$2.00$25.72What is D/P and capital gains yield at t=0 and at t=3?t=0:D1P0=7.78%.CGY=13%7.78%=5.22%.If g=-6%,would anyone buy the stock?If so,at what pric
13、e?Firm still has earnings and still paysdividends,so P0 0:$PDk gD gk gs s01 01=-=+-$2.00 0.94$1.880.13-0.06 0.19=$9.89.What is the annual D/P and capital gains yield?Capital gains yield=g=-6.0%,Dividend yield=13.0%-6.0%=19%.D/P and cap.gains yield are constant,with high dividend yield 19%offsettingn
14、egative capital gains yield.Free Cash Flow MethodnThe free cash flow method suggests that the value of the entire firm equals the present value of the firms free cash flows calculated on an after-tax basis.nRecall that the free cash flow in any given year can be calculated as:NOPAT Net capital inves
15、tment.nOnce the value of the firm is estimated,an estimate of the stock price can be found as follows:lMV of mon stock market capitalization=MV of firm MV of debt and preferred stock.lP=MV of mon stock/#of shares.Using the Free Cash Flow MethodnFree cash flow method is often preferred to the dividen
16、d growth model-particularly for the large number of panies that dont pay a dividend,or for whom it is hard to forecast dividends.Issues Regarding the Free Cash Flow MethodMore.nSimilar to the dividend growth model,the free cash flow method generally assumes that at some point in time,the growth rate
17、 in free cash flow will be e constant.nTerminal value represents the value of the firm at the point in which growth be es constant.FCF Method Issues Continued416.942FCF estimates for the next 3 years are-$5,$10,and$20 million,after which the FCF is expected to grow at 6%.The overall firm cost of cap
18、ital is 10%.0-4.5458.26415.026398.1971 2 3 4k=10%g=6%-5 10 20 21.2021.200.04.*TV3 represents the terminal value of the firm,at t=3.530=*TV3If the firm has$40 million in debt and has 10 million shares of stock,what is the price per share?Value of equity=Total value Value of debt=$416.94$40=$376.94 mi
19、llion.Price per share=Value of equity/#of shares=$376.94/10=$37.69.n Analysts often use the following multiples to value stocks:lP/ElP/CFlP/SaleslP/Customern Example:Based on parable firms,estimate the appropriate P/E.Multiply this by expected earnings to back out an estimate of the stock price.Usin
20、g the Multiples of parable Firms to Estimate Stock PriceIn equilibrium,stock prices are stable.There is no general tendency for people to buy versus to sell.In equilibrium,expected returns mustequal required returns:What is market equilibrium?ks=D1/P0+g=ks=kRF+kM kRFb.ks=D1/P0+g=ks=kRF+kM kRFb.Expec
21、ted returns are obtained by estimating dividends and expected capital gains which can be found using any of the three mon stock valuation approaches.Required returns are obtained from the CAPM.How is equilibrium established?If ks=+g ks,then P0 is“too low a bargain.Buy orders sell orders;P0 bid up;D1
22、/P0 falls untilD1/P0+g=ks=ks.D1P0Why do stock prices change?1.ki could change:ki=kRF+kM kRF bi.kRF=k*+IP.2.g could change due to economic or firm situation.P0=D1ki gWhats the Efficient Market Hypothesis?EMH:Securities are normally in equilibrium and are“fairly priced.One cannot“beat the market excep
23、t through good luck or better information.1.Weak-form EMH:Cant profit by looking at past trends.A recent decline is no reason to think stocks will go up or down in the future.Evidence supports weak-form EMH,but“technical analysis is still used.2.Semistrong-form EMH:All publicly available information
24、 is reflected in stock prices,so doesnt pay to pore over annual reports looking for undervalued stocks.Largely true,but superior analysts can still profit by finding and using new information.3.Strong-form EMH:All information,even inside information,is embedded in stock prices.Not true-insiders can
25、gain by trading on the basis of insider information,but thats illegal.Markets are generally efficient because:1.15,000 or so trained analysts;MBAs,CFAs,Technical PhDs.2.Work for firms like Merrill,Morgan,Prudential,which have a lot of money.3.Have similar access to data.4.Thus,news is reflected in P
26、0 almost instantaneously.Preferred StocknHybrid security.nSimilar to bonds in that preferred stockholders receive a fixed dividend that must be paid before dividends can be paid on mon stock.nHowever,unlike interest payments on bonds,panies can omit dividend payments on preferred stock without fear
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