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Bear Market.
A bear market is a general decline in the stock
market over a period of time
Pricing System
Pure Auction Process.
dealer Market.
Stock Exchange in Pakistan
Karachi Stock Exchange.
1. KSE 100 Index
2. KSE-30 Index
limited liability.
Computing the Price of Common
Stock
The principle of finance is that the value of any
investment is found by computing the value today of
all cash flows the investment will generate over its
life.
Similarly, we value common stock as the value in
todays dollars of all future cash flows.
The cash flows a stockholder may earn from stock
are dividends, the sales price or both.
The One Period Valuation Model
Suppose that you have some extra money to invest
for one year. After a year you will need to sell your
investment. After watching the stock exchange on
TV you decide that you want to buy XYZ stock. You
call your broker and find that XYZ is currently selling
for $50 per share and pays $0.16 per year in
dividends. The analyst on Stock Exchange predicts
that the stock will be selling for $60 in one year.
Should you buy this stock?
The One Period Valuation Model
To answer this question you need to determine
whether the current price accurately reflects the
analysts forecast. To value the stock today, you
need to find the present discounted value of the
expected cash flows (future payments) using the
formula.
The One Period Valuation Model
Div1 P1
P0
(1 ke ) (1 ke )
P0 = the current price of the stock
Div1 = the dividend paid at the end of year 1
ke = the required return on investment in equity
P1 = the sale price of the stock at the end of the first period
The One Period Valuation Model
Dt
P0
t 1 (1 k e ) t
Gordon Growth Model
Assume dividend growth is a constant, denote
as g
D0 (1 g )1 D0 (1 g ) 2 D0 (1 g )
P0
(1 ke )1
(1 ke ) 2
(1 ke )
n D0(1+g1)t Dn(1+g2)t
V =S + S t
t=1 (1 + ke)t t=n+1
(1 + ke)
Exercise
Q #1
LaserAcer is selling at $22.00 per share. The most
recent annual dividend paid was $.80. using the
Gordon Growth model, if the market requires a
return of 11%, what is the expected dividend growth
rate for LaserAcer?
Answer : g = 7.1%
Exercise
Q#2
Huskie Motors just paid an annual dividend of
$1.00 per share. Management has promised
shareholders to increase dividends a constant rate
of 5%. If the required return is 12%, what is the
current price per share?
Answer: P0 = 15
Exercise
Q#3
Suppose Microsoft, Inc. is trading at $27.29 per
share. It pays an annual dividend of $0.32 per share,
which is double its last years dividend of $0.16 per
share. If this trend is expected to continue, what is
the required return on Microsoft?
Answer: ke = 102%
Exercise
Q#4
Gordon & Cos stock has just paid its annual
dividend $1.10 per share. Analysts believe that
Gordon will maintain its historic dividend growth
rate of 3%. If the required return is 8%, what is the
expected price of the stock next year?
Answer: P1 = 23.34
Exercise
Q#5
Macro systems just paid an annual dividend of $0.32
per share. Its dividend is expected to double for the
next four years (D1 through D4), after which it will
grow at a more modest pace of 1% per year. If the
required return is 13%, what is the current price?
Answer: P0 = 32.91
Exercise
Q#6
Analysts are projecting that CB Railway will have
earnings per share $3.90. if the average industry
ratio is about 25, what is the current price of CB
Railways?
Answer: P0 = 97.50
Exercise
Q# 7
Suppose Microsoft, Inc. reported earnings per share
around $0.75. If Microsoft is in an industry with a
ratio ranging from 30 to 40, what is a reasonable
price range for Microsoft?
Answer: 18.26
Exercise
Q#9
Ebay, Inc. went public in September of 1998. the following
information on share outstanding was listed in the final
prospectus filed with the SEC.
In the IPO, the Ebay issued 3,500,000 new shares. The initial
price to the public was $18.00 per share. The final first-day
closing price was $44.88.
If the investment bankers retained $1.26 per share fees,
what was the net proceeds to Ebay?. What was the market
capitalization of new shares of Ebay?
Answer : $58,590,000.00, 157,080,000.00
Exercise
Q # 10
Suppose soft people Inc, is selling at $19.00 and
currently pays an annual dividend of $0.65 per
share. Analysts project that the stock will be priced
around $23.00 in one year. What is the expected
rate ofreturn?
Answer: 24.47