Stock Valuation
Stock value= Present value of the dividends that the company is expected to pay during its life
wheretD� represents
the dividend expected in Period t
rs is the
rate of return investors require to invest in similar risk equity investments
Stock Valuation�Dividend Discount Model (DDM)�
that is, find the present value of all the cash flows expected to be received from the stock in the future.
Is a stock never pays dividends whether a regular or a liquidating dividen. Then......
the value is $0
Preferred stock pays a fixed dividend, much like
interest payments on debt, which are also often fixed.
Like interest on debt preferred dividends are paid before
common dividends, so they are essentially a fixed charge.
In spite of this, however, failure to pay a preferred dividend does not....
A firm may miss preferred dividends, known as.......
so all arrearages must be....
-send the firm into bankruptcy, so prefereed dividends are like equity in that sense.
- "being in arrears," but preferred dividends are cumulative,
-settled before a common dividend is paid
Like debt, preferred stock also has .....
Some preferred stock also has a....
Most preferred stock is......
Remember that debt usually has a special maturity date, while equity......
Preferred stock generally has no.....
-a par value, whereas the value of equity is market determined.
-sinking fund provision, which, like debt, forces the firm to retire portions of the outstanding issue overtime.
-perpetual preferred stock, which had no specific maturity date.
- has no matu
Preferred stock pays a....
which makes it......
You can solve for the present value of a perpetuity by......
-constant preferred dividend every year,
-a perpetuilty.
-dividing the annual payment by the securit's required return.
Different firms have classified shares for different purpose:
Classified shares are often designed to provide
specific shareholder control to a certain class of shareholders, usually the owners, founders, executives, and key insiders of the firm.
Classified shared give a certain class
special voting rights, also called super-voting rights, in which each shares in the class has more votes per share than shares in other classes.
Stock Valuation�Dividend Discount Model (DDM):
when we value stock, we use the same approach described for.......
that is, find the.....
-valuing bonds
-present value of all the cash flows expected
to be received from the stock in the future.
Valuing stocks with zero growth
�a zero-growth stock is one where all future dividends are expected to be the same
a zero-growth stock has dividend payments that represent
a perpetuity
Valuing stocks with normal, or constant, growth
�if a firm has normal, or constant, growth,
then the dividend it pays is expected to grow at a constant rate each year
Expected rate of return on a constant growth stock
�if we rearrange the equation given for the
constant growth model
If we know the market value of the stock, P0, the most recent dividend payment, D0, and the rate at which future dividends are expected to grow, g, we can.....
compute the rate of return that
investors expect the stock to yield
Valuing stocks with nonconstant growth:
-most firms do not growth at constant rates each
year
�that is, nonconstant growth exists.
For such companies, because growth is not constant, we
cannot apply the constant growth model.
This suggests that we have to use the technique discussed in the
time value of money section of the notes to find the present value of an uneven cash flow stream.
Fortunately, however, we can simplify the computation by
assuming that a firm that currently experiences nonconstant growth will begin constant growth at some future date