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Stock Valuation
Vps = D
k ps
Example:
4.125
Vps = =
.095
Example:
4.125
Vps = = $43.42
.095
Expected Rate of Return
on Preferred
Just adjust the valuation model:
Expected Rate of Return
on Preferred
Just adjust the valuation model:
D
kps = Po
Example
If we know the preferred stock price is
$40, and the preferred dividend is
$4.125, the expected return is:
Example
If we know the preferred stock price is
$40, and the preferred dividend is
$4.125, the expected return is:
D 4.125
kps = = =
Po 40
Example
If we know the preferred stock price is
$40, and the preferred dividend is
$4.125, the expected return is:
D 4.125
kps = = = .1031
Po 40
Common Stock
Is a variable-income security.
Dividends may be increased or decreased,
depending on earnings.
Represents equity or ownership.
Includes voting rights.
Limited liability: liability is limited to
amount of owners’ investment.
Priority: lower than debt and preferred.
Common Stock Characteristics
Claim on Income - a stockholder has a
claim on the firm’s residual income.
Claim on Assets - a stockholder has a
residual claim on the firm’s assets in case
of liquidation.
Preemptive Rights - stockholders may
share proportionally in any new stock
issues.
Voting Rights - right to vote for the firm’s
board of directors.
Common Stock Valuation
(Single Holding Period)
? 5.50 + 120
0 1
Common Stock Valuation
(Single Holding Period)
Solution:
D1
Vcs = kcs - g
Constant Growth Model
Assumes common stock dividends will grow
at a constant rate into the future.
Constant Growth Model
Assumes common stock dividends will grow
at a constant rate into the future.
D1
Vcs = kcs - g
Constant Growth Model
Assumes common stock dividends will grow
at a constant rate into the future.
D1
Vcs = kcs - g
Vcs =
Example
XYZ stock recently paid a $5.00
dividend. The dividend is expected to
grow at 10% per year indefinitely.
What would we be willing to pay if our
required return on XYZ stock is 15%?
D1
Vcs = =
kcs - g
Example
XYZ stock recently paid a $5.00
dividend. The dividend is expected to
grow at 10% per year indefinitely.
What would we be willing to pay if our
required return on XYZ stock is 15%?
D1 5.50
Vcs = = =
kcs - g .15 - .10
Example
XYZ stock recently paid a $5.00
dividend. The dividend is expected to
grow at 10% per year indefinitely.
What would we be willing to pay if our
required return on XYZ stock is 15%?
D1 5.50
Vcs = = = $110
kcs - g .15 - .10
Expected Return on
Common Stock
Just adjust the valuation model
Expected Return on
Common Stock
Just adjust the valuation model
D
Vcs =
kcs - g
Expected Return on
Common Stock
Just adjust the valuation model
D
Vcs =
kcs - g
D1
k = ( Vcs
) + g
Expected Return on
Common Stock
Just adjust the valuation model
D
Vcs =
kcs - g
D1
k = ( Po
) + g
Example
We know a stock will pay a $3.00
dividend at time 1, has a price of $27
and an expected growth rate of 5%.
Example
We know a stock will pay a $3.00
dividend at time 1, has a price of $27
and an expected growth rate of 5%.
D1
kcs = ( Po
) + g
Example
We know a stock will pay a $3.00
dividend at time 1, has a price of $27
and an expected growth rate of 5%.
D1
kcs = ( Po
) + g
3.00
kcs = ( ) + .05 =
27
Example
We know a stock will pay a $3.00
dividend at time 1, has a price of $27
and an expected growth rate of 5%.
D1
kcs = ( Po
) + g
3.00
kcs = ( ) + .05 = 16.11%
27
Common Stock Valuation
P/E Ratio Valuation Model
Investors regularly use the price/earnings
ratio (P/E ratio) as a measure of a stock’s
relative value.
Vcs = P/E1 x E1
Vcs = the value of the common stock of the firm
P/E1 = the P/E ratio for the firm based on the current price
per share divided by earnings for the end of Year 1
E1 = estimated earnings per share of common stock for the
end of Year 1
Constant Growth Model
Assumes common stock dividends will grow
at a constant rate into the future.
D1
Vcs = kcs - g