1、8-1Chapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Markets8-1Chapter OutlineBond and Sto8-2Chapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Markets8-

2、2Chapter OutlineBond and Sto8-3Bonds and Stocks: SimilaritiesBoth provide long-term funding for the organizationBoth are future funds that an investor must considerBoth have future periodic paymentsBoth can be purchased in a marketplace at a price “today”8-3Bonds and Stocks: Similarit8-4Bonds and St

3、ocks: DifferencesFrom the firms perspective: a bond is a long-term debt and stock is equityFrom the firms perspective: a bond gets paid off at the maturity date; stock continues indefinitely.We will discuss the mix of bonds (debt) and stock (equity) in a future chapter entitled capital structure8-4B

4、onds and Stocks: Differenc8-5Bonds and Stocks: DifferencesA bond has coupon payments and a lump-sum payment; stock has dividend payments foreverCoupon payments are fixed; stock dividends change or “grow” over time8-5Bonds and Stocks: Differenc8-6A visual representation of a bond with a coupon paymen

5、t (C) and a maturity value (M)12345$C1$C2$C3$C4$C5$M8-6A visual representation of 8-7A visual representation of a share of common stock with dividends (D) forever12345$D1$D2$D3$D4$D5$D8-7A visual representation of 8-8Comparison Valuations123BondCCCMP00123Common StockD1D2D3DP008-8Comparison Valuation

6、s123Bon8-9Notice these differences:The “Cs” are constant and equalThe bond ends (year 5 here)There is a lump sum at the end12345$C1$C2$C3$C4$C5$M8-9Notice these differences:128-10Notice these differences:The dividends are differentThe stock never endsThere is no lump sum12345$D1$D2$D3$D4$D5$D8-10Not

7、ice these differences:18-11Chapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Markets8-11Chapter OutlineBond and St8-12Our Task:To value a share of Common Stock8-12Our Task:8-13And how will we accomplish our task?8-13And how wi

8、ll we accomplish8-14BAEFEIPVTBringAllExpectedFutureEarningsIntoPresentValueTerms8-14BBringAllExpectedFutureEar8-15BAEFEIPVTJust remember:8-15BAEFEIPVTJust remember:8-16Cash Flows for StockholdersIf you buy a share of stock, you can receive cash in two ways:The company pays dividends2. You sell your

9、shares, either to another investor in the market or back to the company8-16Cash Flows for Stockholder8-17One-Period ExampleReceiving one future dividend and one future selling price of a share of common stock8-17One-Period ExampleReceivin8-18One-Period ExampleSuppose you are thinking of purchasing t

10、he stock of Moore Oil, Inc. You expect it to pay a $2 dividend in one year, and you believe that you can sell the stock for $14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay?8-18One-Period ExampleSuppose 8-19Visually this wo

11、uld look like:1D1 = $2P1 = $14R = 20%8-19Visually this would look l8-20Compute the Present Value1D1 = $2P1 = $14R = 20%$1.67$11.67PV =$13.348-20Compute the Present Value11 year = N20% = Discount rate $2 = Payment (PMT)$14 = FVPV = ?-13.341st2ndTI BA II Plus8-218-211 year = N20% = Discount rate 8-22$

12、14 = FV1 year = N$2 = Payment (PMT)20% = Discount rate PV = ?-13.34HP 12-C8-22$14 = FV1 year = N$2 = Pay8-23Two Period ExampleNow, what if you decide to hold the stock for two years? In addition to the dividend in one year, you expect a dividend of $2.10 in two years and a stock price of $14.70 at t

13、he end of year. Now how much would you be willing to pay?8-23Two Period ExampleNow, wha8-24Visually this would look like:2D1 = $2P2 = $14.70R = 20%1D2 = $ 2.108-24Visually this would look l8-25Compute the Present Value2D1 = $2P2 = $14.70R = 20%1D2 = $ 2.10$1.67$1.46$ 10.21$ 13.34 = P08-25Compute the

14、 Present Value28-26What is the Observed Pattern?We value a share of stock by bring back all expected future dividends into present value terms8-26What is the Observed Patte8-27Future DividendsSo the key is to determine the future dividends when given the growth rate of those dividends, whether the g

15、rowth is zero, constant, or unusual first and then levels off to a constant growth rate. 8-27Future DividendsSo the key8-28So how do you compute the future dividends?Three scenarios:A constant dividend (zero growth)The dividends change by a constant growth rateWe have some unusual growth periods and

16、 then level off to a constant growth rate8-28So how do you compute the 8-29So how do you compute the future dividends?Three scenarios:A constant dividend (zero growth)The dividends change by a constant growth rateWe have some unusual growth periods and then level off to a constant growth rate8-29So

17、how do you compute the 8-301. Constant Dividend Zero GrowthThe firm will pay a constant dividend foreverThis is like preferred stockThe price is computed using the perpetuity formula:P0 = D / R8-301. Constant Dividend Z8-31So how do you compute the future dividends?Three scenarios:A constant dividen

18、d (zero growth)The dividends change by a constant growth rateWe have some unusual growth periods and then level off to a constant growth rate8-31So how do you compute the 8-322. Constant Growth Rate of DividendsDividends are expected to grow at a constant percent per period.P0 = D1 /(1+R) + D2 /(1+R

19、)2 + D3 /(1+R)3 + P0 = D0(1+g)/(1+R) + D0(1+g)2/(1+R)2 + D0(1+g)3/(1+R)3 + 8-322. Constant Growth Rate o8-332. Constant Growth Rate of DividendsWith a little algebra this reduces to:8-332. Constant Growth Rate o8-342. Constant Growth Rate of DividendsStudent caution:A. What happens if g R?B. What ha

20、ppens if g = R?8-342. Constant Growth Rate o8-35Dividend Growth Model (DGM) AssumptionsTo use the Dividend Growth Model (aka the Gordon Model), you must meet all three requirements:The growth of all future dividends must be constant,The growth rate must be smaller than the discount rate ( g R), andT

21、he growth rate must not be equal to the discount rate (g R)8-35Dividend Growth Model (DGM8-36DGM Example 1Suppose Big D, Inc., just paid a dividend (D0) of $0.50 per share. It is expected to increase its dividend by 2% per year. If the market requires a return of 15% on assets of this risk, how much

22、 should the stock be selling for?8-36DGM Example 1Suppose Big8-37DGM Example 1 SolutionP0 = .50 ( 1 + .02) .15 - .02P0 = .51 .13= $3.928-37DGM Example 1 SolutionP08-38DGM Example 2Suppose Moore Oil Inc., is expected to pay a $2 dividend in one year. If the dividend is expected to grow at 5% per year

23、 and the required return is 20%, what is the price?8-38DGM Example 2Suppose Moo8-39DGM Example 2 SolutionP0 = 2.00 .20 - .05P0 = 2.00 .15= $13.348-39DGM Example 2 SolutionP08-40So how do you compute the future dividends?Three scenarios:A constant dividend (zero growth)The dividends change by a const

24、ant growth rateWe have some unusual growth periods and then level off to a constant growth rate8-40So how do you compute the 8-413. Unusual Growth;Then Constant GrowthJust draw the time line with the unusual growth rates identified and determine if/when you can use the Dividend Growth Model. Deal wi

25、th the unusual growth dividends separately.8-413. Unusual Growth;Then C8-42Non-constant Growth Problem StatementSuppose a firm is expected to increase dividends by 20% in one year and by 15% for two years. After that, dividends will increase at a rate of 5% per year indefinitely. If the last dividen

26、d was $1 and the required return is 20%, what is the price of the stock?8-42Non-constant Growth Probl8-43Non-constant Growth Problem StatementDraw the time line and compute each dividend using the corresponding growth rate:g = 20%g = 15%g = 15%g = 5% D0 = $1.001234D1D2D38-43Non-constant Growth Probl

27、8-44Non-constant Growth Problem StatementDraw the time line and compute each dividend using the corresponding growth rate:g = 20%g = 15%g = 15%g = 5% D0 = $1.001234D1D2D3D1 = ($1.00) (1 + 20%) = $1.00 x 1.20 = $1.20=1.208-44Non-constant Growth Probl8-45Non-constant Growth Problem StatementDraw the t

28、ime line and compute each dividend using the corresponding growth rate:g = 20%g = 15%g = 15%g = 5% D0 = $1.001234D1D2D3D2 = ($1.20) (1 + 15%) = $1.20 x 1.15 = $1.38=1.388-45Non-constant Growth Probl8-46Non-constant Growth Problem StatementDraw the time line and compute each dividend using the corres

29、ponding growth rate:g = 20%g = 15%g = 15%g = 5% D0 = $1.001234D1D2D3D3 = ($1.38) (1 + 15%) = $1.38 x 1.15 = $1.59=1.598-46Non-constant Growth Probl8-47Non-constant Growth Problem StatementNow we can use the DGM starting with the period of the constant growth rate at our time frame of year 3:g = 20%g

30、 = 15%g = 15%g = 5% D0 = $1.001234D1D2D3P3 = D4/R g P3 = D3 (1 + g) / R - gR = 20%8-47Non-constant Growth Probl8-48Non-constant Growth Problem StatementNow we can use the DGM starting with the period of the constant growth rate at our time frame of year 3:g = 20%g = 15%g = 15%g = 5% D0 = $1.001234D1

31、D2D3 P3 = D3 (1 + g) / R - gP3 = 1.59 (1.05)/ .20 - .05 = $11.13R = 20%8-48Non-constant Growth Probl8-49Non-constant Growth Problem StatementWe now have all of the dividends accounted for and we can compute the present value for a share of common stock:g = 20%g = 15%g = 15%g = 5% D0 = $1.001234D1D2D

32、3R = 20%1.20 1.38 1.59P3 = 11.138-49Non-constant Growth Probl8-50Non-constant Growth Problem StatementBAEFEIPVT!g = 20%g = 15%g = 15%g = 5% D0 = $1.001234D1D2D3R = 20%1.20 1.38 1.59P3 = 11.13$9.328-50Non-constant Growth Probl8-51Stock Price Sensitivity to Dividend Growth, gD1 = $2; R = 20%0501001502

33、0025000.050.10.150.2Growth RateStock Price8-51Stock Price Sensitivity toStock Price Sensitivity to Required Return, RD1 = $2; g = 5%05010015020025000.050.10.150.20.250.3Growth RateStock Price8-52Stock Price Sensitivity to Req8-53Using the DGM to Find RStart with the DGM and then algebraically rearra

34、nge the equation to solve for R:8-53Using the DGM to Find RSta8-54Finding the Required Return - ExampleSuppose a firms stock is selling for $10.50. It just paid a $1 dividend, and dividends are expected to grow at 5% per year. What is the required return? R = 1(1.05)/10.50 + .05 = 15%What is the div

35、idend yield?1(1.05) / 10.50 = 10%What is the capital gains yield?g =5%8-54Finding the Required Retur8-55Stock Valuation AlternativeBut my company doesnt pay dividends! How can I value the stock?8-55Stock Valuation Alternativ8-56Valuation Using MultiplesWe can use the PE ratio and/or the price-sales

36、ratio:Pt = Benchmark PE ratio X EPStPt = Benchmark price-sales ratio X Sales per sharet8-56Valuation Using MultiplesW8-57Stock Valuation Summary8-57Stock Valuation Summary8-58Chapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock M

37、arkets8-58Chapter OutlineBond and St8-59Features of Common StockVoting RightsProxy votingClasses of stock8-59Features of Common StockVo8-60Features of Common StockOther RightsShare proportionally in declared dividendsShare proportionally in remaining assets during liquidationPreemptive right first s

38、hot at new stock issue to maintain proportional ownership if desired8-60Features of Common StockOt8-61Dividend CharacteristicsDividends are not a liability of the firm until a dividend has been declared by the BoardConsequently, a firm cannot go bankrupt for not declaring dividends8-61Dividend Chara

39、cteristicsDi8-62Dividend CharacteristicsDividends and TaxesDividend payments are not considered a business expense; therefore, they are not tax deductibleThe taxation of dividends received by individuals depends on the holding periodDividends received by corporations have a minimum 70% exclusion fro

40、m taxable income8-62Dividend CharacteristicsDi8-63Chapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Markets8-63Chapter OutlineBond and St8-64Features of Preferred StockDividendsStated dividend that must be paid before dividend

41、s can be paid to common stockholdersDividends are not a liability of the firm, and preferred dividends can be deferred indefinitely8-64Features of Preferred Stoc8-65Features of Preferred StockDividendsMost preferred dividends are cumulative any missed preferred dividends have to be paid before commo

42、n dividends can be paid8-65Features of Preferred Stoc8-66Features of Preferred StockPreferred stock generally does not carry voting rights8-66Features of Preferred Stoc8-67Chapter OutlineBond and Stock DifferencesCommon Stock ValuationFeatures of Common StockFeatures of Preferred StockThe Stock Mark

43、ets8-67Chapter OutlineBond and St8-68Stock Market, Dealers vs. BrokersDealer: trades with inventory for bid and ask pricesBroker: matches buyers and sellers for a fee8-68Stock Market, Dealers vs. 8-69Stock MarketNew York Stock Exchange (NYSE)Largest stock market in the worldLicense holders (1,366)Co

44、mmission brokersSpecialistsFloor brokersFloor tradersOperationsFloor activity8-69Stock MarketNew York Stock8-70NASDAQNot a physical exchange it is a computer-based quotation systemMultiple market makersElectronic Communications Networks8-70NASDAQNot a physical excha8-71NASDAQThree levels of informat

45、ion:Level 1 median quotes, registered representativesLevel 2 view quotes, brokers & dealersLevel 3 view and update quotes, dealers onlyA large portion of technology stocks are bought and sold each day on NASDAQ8-71NASDAQThree levels of info8-72Work the WebElectronic Communications Networks provide t

46、rading in NASDAQ securitiesClick on the web surfer and visit Instinet8-72Work the WebElectronic Com8-73Reading Stock Quotes8-73Reading Stock Quotes8-74Work the WebClick on the web surfer to go to Bloomberg for current stock quotes.8-74Work the WebClick on the w8-75Ethics IssuesThe status of pension

47、funding (i.e., over- vs. under-funded) depends heavily on the choice of a discount rate. When actuaries are choosing the appropriate rate, should they give greater priority to future pension recipients, management, or shareholders?How has the increasing availability and use of the internet impacted

48、the ability of stock traders to act unethically?8-75Ethics Issues8-76Quick QuizWhat is the value of a stock that is expected to pay a constant dividend of $2 per year if the required return is 15%?What if the company starts increasing dividends by 3% per year, beginning with the next dividend? The required return stays at 15%.8-76Quick QuizWhat is the valu8-77Comprehensive ProblemXYZ stock currently se