# Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public.

Size: px
Start display at page:

Download "Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public."

## Transcription

1 Stock Valuation

2 Primary Market - Place where the sale of 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 IPO

3 Common Stock - Ownership shares in a publicly held 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.

4

5 Expected 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). Expected Return r Div P P P 0

6 The formula can be broken into two parts. Dividend Yield + Capital Appreciation Div Expected Return r 1 P 0 P P P 1 0 0

7 Dividend Discount Model - Computation of today s stock price which states that share value equals the present value of all expected future dividends. P 0 Div Div Div P H ( 1 r) 1 ( 1 r) 2 ( 1 r) H H H - Time horizon for your investment.

8 Example Current forecasts are for XYZ Company to pay dividends of \$3, \$3.24, and \$3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of \$ What is the price of the stock given a 12% expected return? PV PV 300. ( 1. 12) \$ ( 1. 12) ( 1. 12)

9 If we forecast no growth, and plan to hold out stock indefinitely, we will then value the stock as a PERPETUITY. Perpetuity P 0 Div r 1 1 or EPS r Assumes all earnings are paid to shareholders.

10 Constant Growth DDM - A version of the dividend growth model in which dividends grow at a constant rate (Gordon Growth Model). P 0 Div 1 r g Given any combination of variables in the equation, you can solve for the unknown variable.

11 Example What is the value of a stock that expects to pay a \$3.00 dividend next year, and then increase the dividend at a rate of 8% per year, indefinitely? Assume a 12% expected return. P 0 Div \$ r g \$75. 00

12 Example- continued If the same stock is selling for \$100 in the stock market, what might the market be assuming about the growth in dividends? \$100 g. 09 \$ g Answer The market is assuming the dividend will grow at 9% per year, indefinitely.

13 If 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 out as dividends Plowback Ratio - Fraction of earnings retained by the firm.

14 Growth can be derived from applying the return on equity to the percentage of earnings plowed back into operations. g = return on equity X plowback ratio

15 Example Our 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 blow back 40% of the earnings at the firm s current return on equity of 20%. What is the value of the stock before and after the plowback decision? No Growth With Growth 5 P \$ g P 0 3 \$

16 Cash dividend o All shareholders receive cash in amounts proportional to the number of shares they own o Stock price declines after dividend payment Share repurchase o The company pays cash to buy stocks, reducing the number of shares outstanding o Only the shareholders who choose to sell shares will receive payments o All else the same, stock price remains unchanged

17 A company can declare a stock split and distribute stock dividends No cash is distributed to shareholders Number of shares outstanding increases Additional shares are distributed to all shareholders according to the number of shares each shareholder owns Example: a 10% stock dividend; 1 additional share for each 10 shares a shareholder owns

18 Shareholders need to pay personal income taxes on cash dividend Share repurchase is better from tax perspective, but there are laws preventing it as a regular cash-paying mechanism Outsiders may interpret cash dividend as an indication of superior earnings stock price rises after a dividend increase Similarly, stock price is likely to drop after a dividend decrease

19 Technical Analysts Forecast stock prices based on the watching the fluctuations in historical prices (thus wiggle watchers )

20

21 Fundamental Analysts Research the value of stocks using NPV and other measurements of cash flow

### TIP If you do not understand something,

Valuing common stocks Application of the DCF approach TIP If you do not understand something, ask me! The plan of the lecture Review what we have accomplished in the last lecture Some terms about stocks

### Key Concepts and Skills Chapter 8 Stock Valuation

Key Concepts and Skills Chapter 8 Stock Valuation Konan Chan Financial Management, Spring 2016 Understand how stock prices depend on future dividends and dividend growth Be able to compute stock prices

### Features of Common Stock. The Stock Markets. Features of Preferred Stock. Valuation of Securities: Stocks

Valuation of Securities: Stocks Econ 422: Investment, Capital & Finance University of Washington Eric Zivot Fall 27 January 31, 27 Features of Common Stock Voting rights (Cumulative vs. Straight) Proxy

### LECTURE- 4. Valuing stocks Berk, De Marzo Chapter 9

1 LECTURE- 4 Valuing stocks Berk, De Marzo Chapter 9 2 The Dividend Discount Model A One-Year Investor Potential Cash Flows Dividend Sale of Stock Timeline for One-Year Investor Since the cash flows are

### CHAPTER 8 STOCK VALUATION

CHAPTER 8 STOCK VALUATION Answers to Concepts Review and Critical Thinking Questions 5. The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred.

### Chapter 8. Stock Valuation Process. Stock Valuation

Stock Valuation Process Chapter 8 Stock Valuation: Investors use risk and return concept to determine the worth of a security. In the valuation process: The intrinsic value of any investment equals the

### Bond Valuation. What is a bond?

Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities called bonds. A bond

### Stock valuation. Price of a First period's dividends Second period's dividends Third period's dividends = + + +... share of stock

Stock valuation A reading prepared by Pamela Peterson Drake O U T L I N E. Valuation of common stock. Returns on stock. Summary. Valuation of common stock "[A] stock is worth the present value of all the

### Often stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable.

Reading: Chapter 8 Chapter 8. Stock: Introduction 1. Rights of stockholders 2. Cash dividends 3. Stock dividends 4. The stock split 5. Stock repurchases and liquidations 6. Preferred stock 7. Analysis

### 1. What are the three types of business organizations? Define them

Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas

### CHAPTER 5 HOW TO VALUE STOCKS AND BONDS

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS Answers to Concepts Review and Critical Thinking Questions 1. Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used

Advantages and disadvantages of investing in the Stock Market There are many benefits to investing in shares and we will explore how this common form of investment can be an effective way to make money.

### Goals. Stocks. Common Stock. 1. Voting and Control. Stock basics Historical stock performance

Goals Stocks Stock basics Historical stock performance Economics 71a: Spring 2007 Mayo, chapter 10 Lecture notes 4.1 Common Stock Ownership of piece of a firm Key parts Voting rights (control) Dividends

### You just paid \$350,000 for a policy that will pay you and your heirs \$12,000 a year forever. What rate of return are you earning on this policy?

1 You estimate that you will have \$24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

### Q3: What is the quarterly equivalent of a continuous rate of 3%?

SESSION 1: Pre-requisites: a reminder Time value of money, annuities Q1: You wish to buy a new house but would need to borrow part of the required amount. In view of your revenues you have been able to

### Problem 1 (Issuance and Repurchase in a Modigliani-Miller World)

Problem 1 (Issuance and Repurchase in a Modigliani-Miller World) A rm has outstanding debt with a market value of \$100 million. The rm also has 15 million shares outstanding with a market value of \$10

### Goals. Stock Valuation. Dividend Discount Model Constant Dividends. Dividend Discount Model Constant Dividends

Stock Valuation Economics 71a: Spring 2007 Mayo 11 Malkiel, 5, 6 (136-144), 8 Lecture notes 4.2 Goals Dividend valuation model dividend discount model Forecasting earnings, dividends, and prices Ratio

### Equity Valuation. Lecture Notes # 8. 3 Choice of the Appropriate Discount Rate 2. 4 Future Cash Flows: the Dividend Discount Model (DDM) 3

Equity Valuation Lecture Notes # 8 Contents About Valuation 2 2 Present-Values 2 3 Choice of the Appropriate Discount Rate 2 4 Future Cash Flows: the Dividend Discount Model (DDM) 3 5 The Two-Stage Dividend-Growth

### Chapter 4 Common Stocks

Chapter 4 Common Stocks Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-Income securities. Stocks. Real asset (capital budgeting). Part C Determination

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #8 Prof. Simon Gervais Fall 2011 Term 2

DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #8 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Hors d Age Cheeseworks has been paying a regular cash dividend

### Ordinary Shares Presenter Date

1 Ordinary Shares Presenter Date Contents What is a share? What is an ordinary shares? What are dividends? What is the share price? The benefits of ordinary shares Some things to consider when investing

### FNCE 301, Financial Management H Guy Williams, 2006

Stock Valuation Stock characteristics Stocks are the other major traded security (stocks & bonds). Options are another traded security but not as big as these two. - Ownership Stockholders are the owner

### Learning Objectives. Retained Earnings and Dividends. Chapter 15. Horngren, Best, Fraser, Willett: Accounting 6e 2010 Pearson Australia

PowerPoint to accompany Companies: Retained earnings, share splits and buy-backs, and the income statement Chapter 15 Learning Objectives 1. Account for share dividends 2. Distinguish share splits from

### There are two types of returns that an investor can expect to earn from an investment.

Benefits of investing in the Stock Market There are many benefits to investing in shares and we will explore how this common form of investment can be an effective way to make money. We will discuss some

### ] (3.3) ] (1 + r)t (3.4)

Present value = future value after t periods (3.1) (1 + r) t PV of perpetuity = C = cash payment (3.2) r interest rate Present value of t-year annuity = C [ 1 1 ] (3.3) r r(1 + r) t Future value of annuity

### CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis

CIS September 2012 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Corporate Finance (1 13) 1. Assume a firm issues N1 billion in debt

### Stock Dividends. Stock Dividends and Stock Splits. Amount of Stock Dividend. Created in 2006 By Michael Worthington Elizabeth City State University

Stock Dividends and Stock Splits Created in 2006 By Michael Worthington Elizabeth City State University Stock Dividends Stock Dividends consist of additional shares of issued to current stockholders (instead

### Chapter 9 Valuing Stocks

Chapter 9 Valuing Stocks 9-1. Assume Evco, Inc., has a current price of \$50 and will pay a \$2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right

### Chapter 7 Stocks, Stock Valuation, and Stock Market Equilibrium ANSWERS TO END-OF-CHAPTER QUESTIONS

Chapter 7 Stocks, Stock Valuation, and Stock Market Equilibrium ANSWERS TO END-OF-CHAPTER QUESTIONS 7-1 a. A proxy is a document giving one person the authority to act for another, typically the power

Investing in Stocks McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 14-1 Invest in stocks Learning Objectives Identify the most important features of common and

### Chapter 17: Financial Statement Analysis

FIN 301 Class Notes Chapter 17: Financial Statement Analysis INTRODUCTION Financial ratio: is a relationship between different accounting items that tells something about the firm s activities. Purpose

### STUDENT CAN HAVE ONE LETTER SIZE FORMULA SHEET PREPARED BY STUDENT HIM/HERSELF. FINANCIAL CALCULATOR/TI-83 OR THEIR EQUIVALENCES ARE ALLOWED.

Test III-FINN3120-090 Fall 2009 (2.5 PTS PER QUESTION. MAX 100 PTS) Type A Name ID PRINT YOUR NAME AND ID ON THE TEST, ANSWER SHEET AND FORMULA SHEET. TURN IN THE TEST, OPSCAN ANSWER SHEET AND FORMULA

### 11. Long term financial planning and growth (part 2)

1 11. Long term financial planning and growth (part 2) In these slides, we go into more detail on long-term planning. Topics include: Partial capacity and lumpy investment in fixed assets Interest and

### In this presentation I will introduce some basic elements of financial forecasting and how they connect with the financial plan.

In this presentation I will introduce some basic elements of financial forecasting and how they connect with the financial plan. 1 The pro forma financial statements in the financial plan will include

### Chapter 14 Capital Structure in a Perfect Market

Chapter 14 Capital Structure in a Perfect Market 14-1. Consider a project with free cash flows in one year of \$130,000 or \$180,000, with each outcome being equally likely. The initial investment required

### Dividend valuation models Prepared by Pamela Peterson Drake, Ph.D., CFA

Dividend valuation models Prepared by Pamela Peterson Drake, Ph.D., CFA Contents 1. Overview... 1 2. The basic model... 1 3. Non-constant growth in dividends... 5 A. Two-stage dividend growth... 5 B. Three-stage

### M5.1 Forecasting from Traded Price-to-Book Ratios: Cisco Systems Inc.

M5.1 Forecasting from Traded Price-to-Book Ratios: Cisco Systems Inc. Price = \$21 Required equity return = 12% Forward P/E = \$21/\$0.89 = 23.60 Book value per share = \$25,826/6,735 = \$3.835 P/B = \$21/3.835

### CHAPTER 2 How to Calculate Present Values

CHAPTER How to Calculate Present Values 0. Mr. Basset is buying a security worth \$0,000 now, which is its present value. The unknown is the annual payment. Using the present value of an annuity formula,

Review for Exam 3 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems. You are not responsible for any topics that are not covered in the lecture note

### Common Stock Valuation & Performance Measurement

Module 4 Common Stock Valuation & Performance Measurement by Jason G. Hovde, CIMA, CFP, APMA 7350 This publication may not be duplicated in any way without the express written consent of the publisher.

### Chapter Review and Self-Test Problems

CHAPTER 8 Stock Valuation 265 2. As the owner of shares of common stock in a corporation, you have various rights, including the right to vote to elect corporate directors. Voting in corporate elections

### Factors Influencing Price/Earnings Multiple

Learning Objectives Foundation of Research Forecasting Methods Factors Influencing Price/Earnings Multiple Passive & Active Asset Management Investment in Foreign Markets Introduction In the investment

Review for Exam 3 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### Econ 330 Exam 1 Name ID Section Number

Econ 330 Exam 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate of monetary growth

### Achievement of Market-Friendly Initiatives and Results Program (AMIR 2.0 Program) Funded by U.S. Agency for International Development

Achievement of Market-Friendly Initiatives and Results Program (AMIR 2.0 Program) Funded by U.S. Agency for International Development Equity Analysis, Portfolio Management, and Real Estate Practice Quizzes

### ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure

ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure Chapter 9 Valuation Questions and Problems 1. You are considering purchasing shares of DeltaCad Inc. for \$40/share. Your analysis of the company

### E15-1. Understanding Shareholders Equity

E15-1. Understanding Shareholders Equity Preferred stock is a class of capital stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the

### CHAPTER 11 Reporting and Analyzing Stockholders Equity

CHAPTER 11 Reporting and Analyzing Stockholders Equity Major Characteristics of a Corporation Ownership A publicly held corporation is regularly traded on a national securities market and may have thousands

### Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.)

Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.) The primary focus of the next two chapters will be to examine the debt/equity choice by firms. In particular,

### SAMPLE FACT EXAM (You must score 70% to successfully clear FACT)

SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) 1. What is the present value (PV) of \$100,000 received five years from now, assuming the interest rate is 8% per year? a. \$600,000.00 b.

### What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

### Section I. Investing In Common Stocks

Section I Investing In Common Stocks A corporation is a company that is a separate legal entity owned by stockholders. In other words, the corporation functions like a single person separate from its owners

### CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are

### Practice Questions for Midterm II

Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. -1. d. 0.5. By definition, the beta of the market portfolio is

### Equity Analysis and Capital Structure. A New Venture s Perspective

Equity Analysis and Capital Structure A New Venture s Perspective 1 Venture s Capital Structure ASSETS Short- term Assets Cash A/R Inventories Long- term Assets Plant and Equipment Intellectual Property

### Closed-End Funds. A closed-end fund is a type of investment company. whose shares are listed on a stock exchange

a guide to Closed-End Funds A closed-end fund is a type of investment company whose shares are listed on a stock exchange or are traded in the over-the-counter market. Contents What Is a Closed-End Fund?...2

### Forecasting and Valuation of Enterprise Cash Flows 1. Dan Gode and James Ohlson

Forecasting and Valuation of Enterprise Cash Flows 1 1. Overview FORECASTING AND VALUATION OF ENTERPRISE CASH FLOWS Dan Gode and James Ohlson A decision to invest in a stock proceeds in two major steps

### CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS

1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries

### CHAPTER 9 Stocks and Their Valuation

CHAPTER 9 Stocks and Their Valuation Preferred stock Features of common stock etermining common stock values Efficient markets 1 Preferred Stock Hybrid security. Similar to bonds in that preferred stockholders

### Bank Valuation: Comparable Public Companies & Precedent Transactions

Bank Valuation: Comparable Public Companies & Precedent Transactions Picking a set of comparable companies or precedent transactions for a bank is very similar to what you d do for any other company here

### Lecture Notes 11. Equity Valuation. VI. DDM, Investment Opportunities, and Payout Policy

Prof. Alex Shapiro Lecture Notes Equity aluation I. Readings and Suggested Practice Problems II. aluation and its Uses III. Present alue Models I. Approaches to Expected Return etermination. Constant Growth

### Chapter 7. . 1. component of the convertible can be estimated as 1100-796.15 = 303.85.

Chapter 7 7-1 Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders

### MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A

MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A Fall Semester 2004 Name: Class: Day/Time/Instructor:. Read the following directions very carefully. Failure to follow these directions will

### a) The Dividend Growth Model Approach: Recall the constant dividend growth model for the price of a rm s stock:

Cost of Capital Chapter 14 A) The Cost of Capital: Some Preliminaries: The Security market line (SML) and capital asset pricing model (CAPM) describe the relationship between systematic risk and expected

### Fundamentals Level Skills Module, Paper F9. Section A. Monetary value of return = \$3 10 x 1 197 = \$3 71 Current share price = \$3 71 \$0 21 = \$3 50

Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2014 Answers Section A 1 A Monetary value of return = \$3 10 x 1 197 = \$3 71 Current share price = \$3 71 \$0 21 = \$3 50 2

### Fundamental analysis. Course 10

Course 10 Fundamental analysis Topic 1: Fundamental analysis - an introduction... 3 Analysing individual companies... 3 What are you trying to learn about a company?... 4 Topic 2: Annual Report... 6 Sourcing

### Suggested Answers to Discussion Questions

Suggested Answers to Discussion Questions 1. Arguments for Mutual Fund Ownership Greater level of diversification Professional management Establish an investment program with a limited amount of capital

### UNDERSTANDING CLOSED-END FUNDS

Lessons in Investing for Income UNDERSTANDING CLOSED-END FUNDS Income is one of investors most common goals but one not easily achieved, especially in today s low-yielding environment. That s why investors

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2.

DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%, and investors pay a tax

### Running head: THE VALUATION OF WAL-MART 1

Running head: THE VALUATION OF WAL-MART 1 The Valuation of Wal-Mart CPT Becky Lux, CPT Ino Ruiz, and ENS Jujuane Hairston Army-Baylor MHA/MBA Graduate Program THE VALUATION OF WAL-MART 2 In fiscal year

### Sagicor Life Jamaica Limited Gail Ansine Mgr. Research & Fin. Analysis gansine@scotiadbg.com

(\$) (Units) March 14, 2012 Sagicor Life Jamaica Limited Gail Ansine Mgr. Research & Fin. Analysis gansine@scotiadbg.com Company & Industry Overview Sagicor Life Jamaica is the leading life insurance Company

Ratio Analysis CBDC, NB February, 2008 Presented by ACSBE Financial Analysis What is Financial Analysis? What Can Financial Ratios Tell? 7 Categories of Financial Ratios Significance of Using Ratios Industry

### Accrual Accounting and Valuation: Pricing Earnings

Security, Third Chapter Six LINKS Accrual Accounting and : Pricing Earnings Link to previous chapter Chapter 5 showed how to price book values in the balance sheet and calculate intrinsic price-to-book

### Stock Valuation. Everything You Wanted to Know About Stocks. and Their Value. FINC 3610 Yost

Everything You Wanted to Know About Stocks and Their Value 158 Let s Review The price (value) of a bond is equal to the of the bond's cash flows. 159 Stock Valuation The price (value) of a share of stock

### MGT201 Solved MCQs(500) By

MGT201 Solved MCQs(500) By http://www.vustudents.net Why companies invest in projects with negative NPV? Because there is hidden value in each project Because there may be chance of rapid growth Because

### for Analysing Listed Private Equity Companies

8 Steps for Analysing Listed Private Equity Companies Important Notice This document is for information only and does not constitute a recommendation or solicitation to subscribe or purchase any products.

### GESTÃO FINANCEIRA II PROBLEM SET 2 - SOLUTIONS

GESTÃO FINANCEIRA II PROBLEM SET - SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 010-011 Yield to Maturity Chapter 8 Valuing Bonds 8-3. The following

### NPV calculation. Academic Resource Center

NPV calculation Academic Resource Center 1 NPV calculation PV calculation a. Constant Annuity b. Growth Annuity c. Constant Perpetuity d. Growth Perpetuity NPV calculation a. Cash flow happens at year

### Cost of Capital and Project Valuation

Cost of Capital and Project Valuation 1 Background Firm organization There are four types: sole proprietorships partnerships limited liability companies corporations Each organizational form has different

Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### Chapter 5 Valuing Stocks

Chapter 5 Valuing Stocks MULTIPLE CHOICE 1. The first public sale of company stock to outside investors is called a/an a. seasoned equity offering. b. shareholders meeting. c. initial public offering.

### How to Calculate Present Values

How to Calculate Present Values Michael Frantz, 2010-09-22 Present Value What is the Present Value The Present Value is the value today of tomorrow s cash flows. It is based on the fact that a Euro tomorrow

### Chapter 9. The Valuation of Common Stock. 1.The Expected Return (Copied from Unit02, slide 39)

Readings Chapters 9 and 10 Chapter 9. The Valuation of Common Stock 1. The investor s expected return 2. Valuation as the Present Value (PV) of dividends and the growth of dividends 3. The investor s required

### Corporate Finance: Final Exam

Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. 1. DayTop Inns is a publicly traded company, with 10 million shares

### MBA Financial Management and Markets Exam 1 Spring 2009

MBA Financial Management and Markets Exam 1 Spring 2009 The following questions are designed to test your knowledge of the fundamental concepts of financial management structure [chapter 1], financial

### CHAPTER 14 COST OF CAPITAL

CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,

### CHAPTER 18 Dividend and Other Payouts

CHAPTER 18 Dividend and Other Payouts Multiple Choice Questions: I. DEFINITIONS DIVIDENDS a 1. Payments made out of a firm s earnings to its owners in the form of cash or stock are called: a. dividends.

FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

### Relative valuation and Technical Analysis

Relative valuation and Technical Analysis Relative vs. fundamental valuation The DCF model is a method of fundamental valuation. Value of equity is the present value of future cash flows. Ignores the current

### CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 5. The sustainable growth rate is greater than 20 percent, because at a 20 percent growth rate

### Chapter 1 Introduction to Finance

Chapter 1 Introduction to Finance Road Map Part A Introduction to finance. Financial decisions and financial markets. Present value. Part B Valuation of assets, given discount rates. Part C Determination

### THE VALUATION OF A SAVINGS ACCOUNT

THE VALUATION OF A SAVINGS ACCOUNT (With Seven Insights) A savings account is a simple investment that we all understand. We shall use it as a prototype for equity valuation. We shall use it to test ideas

### Module 8 Investing in stocks

1. Overview Module 8 Investing in stocks Prepared by Pamela Peterson Drake, Ph.D., CFA When an investor buys a share of common stock, it is reasonable to expect that what an investor is willing to pay

### University of Waterloo Midterm Examination

Student number: Student name: ANONYMOUS Instructor: Dr. Hongping Tan Duration: 1.5 hours AFM 371/2 Winter 2011 4:30-6:00 Tuesday, March 1 This exam has 12 pages including this page. Important Information:

### Chapter 14 Assessing Long-Term Debt, Equity, and Capital Structure

I. Capital Structure (definitions) II. MM without Taxes (1958) III. MM with Taxes (1963) Chapter 14 Assessing Long-Term Debt, Equity, and Capital Structure IV. Financial Distress V. Business Risk VI. Financial

### INVESTMENT INCOME PROJECTION & FORECASTING

INVESTMENT INCOME PROJECTION & FORECASTING Session 703 AGENDA Conceptual Fundamentals Market expectations and projection Investment scenarios and forecasts for various asset classes Reporting Field Report

### Referred to as the statement of financial position provides a snap shot of a company s assets, liabilities and equity at a particular point in time.

Glossary Aggressive investor Balance sheet Bear market Typically has a higher risk appetite. They are prepared or can afford to risk much more and for this they stand to reap the big rewards. Referred

### Unit 01. 1. Return computation with cash purchase vs. margin purchase

FCS 5510 Formula Sheet *Note: The formulas I expect you to know are colored in Red. They are either more conceptually based, or are more commonly used than the others. You need to have a passing familiarity