SECONDARY MARKET - Market in which already issued securities are traded among investors.

Transcription

1 Stock valuatio STOCK - Oweship shaes i a publicly held copoatio. RIMARY MARKET - Maket fo ewly-issued secuities, sold by the compay to aise cash. INITIAL UBLIC OFFERING (IO) - Fist offei of stock to the eeal public. SECONDARY MARKET - Maket i which aleady issued secuities ae taded amo ivestos. DIVIDEND - eiodic cash distibutio fom the fim to its shaeholdes. RICE-EARNINGS (/E) MULTILE - Ratio of stock pice to eais pe shae. BOOK VALUE - Net woth of the fim accodi to the balace sheet. LIQUIDATION VALUE - Net poceeds that would be ealized by selli the fim s assets ad payi off its ceditos. MARKET-VALUE BALANCE SHEET - Fiacial statemet that uses the maket value of all assets ad liabilities. Maket value is the amout that ivestos ae willi to pay fo the shaes of the fim. This depeds o the eai powe of today s assets ad the expected pofitability of futue ivestmets. Expected (ate of) etu The cash payoff to owes of commo stocks comes i two foms: () cash divideds ad () capital ais o losses. Usually ivestos expect to et some of each. Suppose that the cuet pice of a shae is, that the expected pice a yea fom ow is, ad that the expected divided pe shae is DIV. The subscipt o deotes time zeo, which is today; the subscipt o deotes time, which is yea hece. We simplify by assumi that divideds ae paid oly oce a yea ad that the ext divided will come i yea. The ate of etu that ivestos expect fom this shae ove the ext yea is the expected divided pe shae DIV plus the expected icease i pice, all divided by the pice at the stat of the yea : Expected etu = = Expected ate of etu = expected divided yield + expected capital ai Expected ate of etu = We ca also explai the maket value of the stock i tems of ivestos foecasts of divideds ad pice ad the expected etu offeed by othe equally isky stocks. This is just the peset value of the cash flows the stock will povide to its owe:

2 ice today = = DIVIDEND DISCOUNT MODEL - Discouted cash-flow model of today s stock pice which states that shae value equals the peset value of all expected futue divideds. We have maaed to explai today s stock pice i tems of the divided DIV ad the expected stock pice ext yea. But futue stock pices ae ot easy to foecast diectly, thouh you may ecoute idividuals who claim to be able to do so. A fomula that equies tomoow s stock pice to explai today s stock pice is ot eeally helpful. As it tus out, we ca expess a stock s value as the peset value of all the foecast futue divideds paid by the compay to its shaeholdes without efei to the futue stock pice. This is the divided discout model:... I wods, the value of a stock is the peset value of the divideds it will pay ove the ivesto s hoizo plus the peset value of the expected stock pice at the ed of that hoizo. THE DIVIDEND DISCOUNT MODEL WITH NO GROWTH The divided discout model says that these o-owth shaes should sell fo the peset value of a costat, pepetual steam of divideds. We leaed how to do that calculatio whe we valued pepetuities ealie. Just divide the aual cash paymet by the discout ate. The discout ate is the ate of etu demaded by ivestos i othe stocks of the same isk: THE CONSTANT-GROWTH DIVIDEND DISCOUNT MODEL The divided discout model equies a foecast of divideds fo evey yea ito the futue, which poses a bit of a poblem fo stocks with potetially ifiite lives. Uless we wat to sped a lifetime foecasti divideds, we must use simplifyi assumptios to educe the umbe of estimates. The simplest simplificatio assumes a o-owth pepetuity which woks fo o-owth commo shaes. Hee s aothe simplificatio that fids a ood deal of pactical use. Suppose foecast divideds ow at a costat ate ito the idefiite futue. If divideds ow at a steady ate, the istead of foecasti a ifiite umbe of divideds, we eed to foecast oly the ext divided ad the divided owth ate. Althouh thee is a ifiite umbe of tems, each tem is popotioately smalle tha the pecedi oe as lo as the divided owth ate is less tha the discout ate. Because the peset value of fa-distat divideds will be eve-close to zeo, the sum of all of these tems is fiite despite the fact that a ifiite umbe of divideds will be paid. The sum ca be show to equal:

3 ESTIMATING EXECTED RATES OF RETURN Ecoomists aue about which statistical models ive the best estimates. Thee ae evetheless some useful ules of thumb that ca ive sesible umbes. Oe ule of thumb is based o the costat-owth divided discout model. Remembe that it foecasts a costat owth ate i both futue divideds ad stock pices. That meas foecast capital ais equal pe yea. We ca calculate the expected ate of etu by eaai the costat-owth fomula as: divided yield + owth ate NONCONSTANT GROWTH May compaies ow at apid o ieula ates fo seveal yeas befoe fially settli dow. Obviously we ca t use the costat-owth divided discout model i such cases. Howeve, we have aleady looked at a alteative appoach. Set the ivestmet hoizo (Yea H) at the futue yea by which you expect the compay s owth to settle dow. Calculate the peset value of divideds fom ow to the hoizo yea. Foecast the stock pice i that yea ad discout it also to peset value. The add up to et the total peset value of divideds plus the edi stock pice. The fomula is:... Gowth Stocks ad Icome Stocks AYOUT RATIO Factio of eais paid out as divideds. LOWBACK RATIO - Factio of eais etaied by the fim. = etu o equity * plowback atio RESENT VALUE OF GROWTH OORTUNITIES (VGO) - Net peset value of a fim s futue ivestmets. SUSTAINABLE GROWTH RATE Steady ate at which fim ca ow; etu o equity plowback atio. Gowth ates calculated as = etu o equity plowback atio ae ofte efeed to as sustaiable owth ates.

4 oblems A.. Compay X is iceasi ext yea s divided to $5. pe shae. The foecast stock pice ext yea is $5. Equally isky stocks of othe compaies offe expected ates of etu of pecet. What should Compay X commo stock sell fo? A.. Assume that Compay s X divided ad shae pice ae expected to ow at a costat 5 pecet pe yea. Calculate the cuet value of Compay X stock with the divided discout model usi a 3-yea hoizo. You should et the same aswe as i A... A.. Mooshie Idusties has poduced a bael pe week fo the past yeas but caot ow because of cetai leal hazads. It eas $5 pe shae pe yea ad pays it all out to stockholdes. The stockholdes have alteative, equivalet-isk vetues yieldi pecet pe yea o aveae. How much is oe shae of Mooshie woth? Assume the compay ca keep oi idefiitely. A.3. Coppe ca ow at 5 pecet pe yea fo the idefiite futue. It s selli at $ ad ext yea s divided is $5.. What is the expected ate of etu fom ivesti i Mii commo stock? Coppe ad Mii shaes ae equally isky. A.4. Suppose that aothe stock maket aalyst pedicts that Uited Bid Seed will ot settle dow to a costat 5 pecet owth ate i divideds util afte Yea 4, ad that divideds i Yea 4 will be $.73 pe shae. What is the fai pice fo the stock accodi to this aalyst? A.5. Suppose that istead of plowi moey back ito lucative vetues, Blue Skies s maaemet is ivesti at a expected etu o equity of pecet, which is below the etu of pecet that ivestos could expect to et fom compaable secuities. a. Fid the sustaiable owth ate of divideds ad eais i these cicumstaces. Assume a 6 pecet payout atio. b. Fid the ew value of its ivestmet oppotuities. Explai why this value is eative despite the positive owth ate of eais ad divideds. c. If you wee a copoate aide, would Blue Skies be a ood cadidate fo a attempted takeove? A.6. Favoed stock will pay a divided this yea of $.4 pe shae. Its divided yield is 8 pecet. At what pice is the stock selli? A.7. Watewoks has a divided yield of 8 pecet. If its divided is expected to ow at a costat ate of 5 pecet, what must be the expected ate of etu o the compay s stock? A.8. Steady As She Goes, Ic., will pay a yea-ed divided of $.5 pe shae. Ivestos expect the divided to ow at a ate of 4 pecet idefiitely. a. If the stock cuetly sells fo $5 pe shae, what is the expected ate of etu o the stock? b. If the expected ate of etu o the stock is 6.5 pecet, what is the stock pice? A.9. Iteated otato Chips paid a $ pe shae divided yesteday. You expect the divided to ow steadily at a ate of 4 pecet pe yea. a. What is the expected divided i each of the ext 3 yeas? b. If the discout ate fo the stock is pecet, at what pice will the stock sell?

5 c. What is the expected stock pice 3 yeas fom ow? d. If you buy the stock ad pla to hold it fo 3 yeas, what paymets will you eceive? What is the peset value of those paymets? Compae you aswe to (b). A.. You expect a shae of stock to pay divideds of $., $.5, ad $.5 i each of the ext 3 yeas. You believe the stock will sell fo $ at the ed of the thid yea. a. What is the stock pice if the discout ate fo the stock is pecet? b. What is the divided yield? Susa biblioafica: - Richad A. Bealey, Stewat C. Myes, Ala J. Macus - Fudametals of Copoate Fiace, Thid Editio, McGaw - Hill imis Custom ublishi,