Stock Characteristic Valuation Types of Stock Preferred Stock

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Stock Characteristic & Valuation

Stock Characteristic & Valuation

Types of Stock Preferred Stock l Common Stock l Both are related to ownership

Types of Stock Preferred Stock l Common Stock l Both are related to ownership

Security Valuation l In general, the intrinsic value of an asset = the present

Security Valuation l In general, the intrinsic value of an asset = the present value of the stream of expected cash flows discounted at an appropriate required rate of return.

Preferred Stock A hybrid security: l It’s like common stock - no fixed maturity.

Preferred Stock A hybrid security: l It’s like common stock - no fixed maturity. l l Technically, it’s part of equity capital. It’s like debt - preferred dividends are fixed. l Missing a preferred dividend does not constitute default, but preferred dividends are cumulative.

Preferred Stock Features Firms may have multiple classes of preferreds, each with different features.

Preferred Stock Features Firms may have multiple classes of preferreds, each with different features. l Priority: lower than debt, higher than common stock. l Cumulative feature: all past unpaid preferred stock dividends must be paid before any common stock dividends are declared. l

Preferred Stock Features Convertibility: many preferreds are convertible into common shares. l Adjustable rate

Preferred Stock Features Convertibility: many preferreds are convertible into common shares. l Adjustable rate preferreds have dividends tied to interest rates. l Participation: some (very few) preferreds have dividends tied to the firm’s earnings. l

Preferred Stock Valuation l A preferred stock can usually be valued like a perpetuity:

Preferred Stock Valuation l A preferred stock can usually be valued like a perpetuity: Vps = D k ps

Example: Xerox preferred pays an 8. 25% dividend on a $50 par value. l

Example: Xerox preferred pays an 8. 25% dividend on a $50 par value. l Suppose our required rate of return on Xerox preferred is 9. 5%. l Vps = 4. 125. 095 = $43. 42

Expected Rate of Return on Preferred l Just adjust the valuation model: kps =

Expected Rate of Return on Preferred l Just adjust the valuation model: kps = D Po

Example l If we know the preferred stock price is $40, and the preferred

Example l If we know the preferred stock price is $40, and the preferred dividend is $4. 125, the expected return is: kps = D Po = 4. 125 =. 1031 40

Common Stock l Is a variable-income security. l Dividends may be increased or decreased,

Common Stock l Is a variable-income security. l Dividends may be increased or decreased, depending on earnings. Represents equity or ownership. l Includes voting rights. l Limited liability: liability is limited to amount of owners’ investment. l Priority: lower than debt and preferred. l

Common Stock Characteristics l l Claim on Income - a stockholder has a claim

Common Stock Characteristics l l 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) l l You expect XYZ stock to pay

Common Stock Valuation (Single Holding Period) l l You expect XYZ stock to pay a $5. 50 dividend at the end of the year. The stock price is expected to be $120 at that time. If you require a 15% rate of return, what would you pay for the stock now? ? 5. 50 + 120 0 1

Common Stock Valuation (Single Holding Period) Solution: Vcs = (5. 50/1. 15) + (120/1.

Common Stock Valuation (Single Holding Period) Solution: Vcs = (5. 50/1. 15) + (120/1. 15) = 4. 783 = $109. 13 + 104. 348

Common Stock Valuation (Multiple Holding Periods) l Constant l Growth Model Assumes common stock

Common Stock Valuation (Multiple Holding Periods) l Constant l Growth Model Assumes common stock dividends will grow at a constant rate into the future. Vcs = D 1 kcs - g

Constant Growth Model l Assumes common stock dividends will grow at a constant rate

Constant Growth Model l Assumes common stock dividends will grow at a constant rate into the future. Vcs = l l l D 1 kcs - g D 1 = the dividend at the end of period 1. kcs = the required return on the common stock. g = the constant, annual dividend growth rate.

Example l XYZ stock recently paid a $5. 00 dividend. The dividend is expected

Example l 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%? D 0 = $5, so D 1 = 5 (1. 10) = $5. 50

Example l XYZ stock recently paid a $5. 00 dividend. The dividend is expected

Example l 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%? Vcs = D 1 kcs - g = 5. 50. 15 -. 10 = $110

Expected Return on Common Stock l Just adjust the valuation model Vcs = D

Expected Return on Common Stock l Just adjust the valuation model Vcs = D kcs - g

Expected Return on Common Stock l Just adjust the valuation model Vcs = k

Expected Return on Common Stock l Just adjust the valuation model Vcs = k = ( D kcs - g D 1 Po ) + g

Example l We know a stock will pay a $3. 00 dividend at time

Example l 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 l We know a stock will pay a $3. 00 dividend at time

Example l 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%. kcs = ( D 1 Po ) + g

Example l We know a stock will pay a $3. 00 dividend at time

Example l 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%. kcs = ( ( 3. 00 27 D 1 Po ) + g ) +. 05 = 16. 11%

Intermezo Mengapa di komputer ada tombol ENTER Karena kalau tombolnya ENTAR programnya tidak segera

Intermezo Mengapa di komputer ada tombol ENTER Karena kalau tombolnya ENTAR programnya tidak segera jalan

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