Fundamentals of Corporate Finance Third edition Chapter 5 Valuing Stocks Brealey Myers Marcus ndamentals of Corporate Finan Brealey Myers Marcus slides by Matthew will IrwinMcGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 1 Irwin/McGraw-Hill Chapter 5 Fundamentals of Corporate Finance Third Edition Valuing Stocks Brealey Myers Marcus slides by Matthew Will Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc.,2001
5-2 Topics Covered STocks and the Stock Market →BookⅤ alues, Liquidation Values and Market values O Valuing Common Stocks SImplifying the Dividend Discount Model SGrowth stocks and Income stocks Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 2 Irwin/McGraw-Hill Topics Covered Stocks and the Stock Market Book Values, Liquidation Values and Market Values Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income Stocks
5-3 Stocks Stock Market Primary market- Place where the sale of new stock first occurs Initial Public Offering(IPO)-First offering of stock to the general public Seasoned issue Sale of new shares by a firm that has already been through an IPO Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 3 Irwin/McGraw-Hill Stocks & Stock Market Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a firm that has already been through an IPO
5-4 Stocks Stock Market Common Stock -Ownership shares in a ublicly held corporation Secondary market- market in which already issued securities are traded by investors Dividend- Periodic cash distribution from the firm to the shareholders P/E Ratio- Price per share divided by earnings per share Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 4 Irwin/McGraw-Hill Stocks & Stock Market Common Stock - Ownership shares in a publicly held corporation. Secondary Market - market in which already issued securities are traded by investors. Dividend - Periodic cash distribution from the firm to the shareholders. P/E Ratio - Price per share divided by earnings per share
5-5 Stocks Stock Market 57776 6000 5000 4481.7 4000 3000 2000 1414.1 1308.6 1000 570.5 305.2 Stock Market Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 5 Irwin/McGraw-Hill Stocks & Stock Market 5777.6 4481.7 1989.5 1414.1 896.1 1067.7 1308.6 570.5 222 305.2 143.2 0 1000 2000 3000 4000 5000 6000 1997 Trading Value ($bil) NYSE Nasdaq London Paris Tokyo German Taiwan Zurich Osaka Toronto Amex Stock Market
5-6 Stocks Stock Market Book Value- Net worth of the firm according to the balance sheet Liquidation Value - Net proceeds that would be realized by selling the firms assets and paying off its creditors Market value balance sheet- financial statement that uses market value of assets and liabilities Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 6 Irwin/McGraw-Hill Stocks & Stock Market Book Value - Net worth of the firm according to the balance sheet. Liquidation Value - Net proceeds that would be realized by selling the firm’s assets and paying off its creditors. Market Value Balance Sheet - Financial statement that uses market value of assets and liabilities
5-7 Valuing Common Stocks Expected Return The percentage yield that an investor forecasts from a specific investment over a set period of time. Sometimes called the holding period return(HPR) Div,+p-p Expected Return =r 0 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 7 Irwin/McGraw-Hill Valuing Common Stocks Expected Return - The percentage yield that an investor forecasts from a specific investment over a set period of time. Sometimes called the holding period return (HPR). Expected Return = = + − r Div P P P 1 1 0 0
5-8 Valuing Common Stocks The formula can be broken into two parts Dividend Yield Capital Appreciation Expected Return =r= ii P-P + P 0 Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 8 Irwin/McGraw-Hill Valuing Common Stocks The formula can be broken into two parts. Dividend Yield + Capital Appreciation Expected Return = = + − r Div P P P P 1 0 1 0 0
5-9 Valuing Common Stocks Dividend Discount Model -Computation of today's stock price which states that share value equals the present value of all expected future dividends Di DiV2+ Div t p + (1+r)(1+r) (1+r) H- Time horizon for your investment Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 9 Irwin/McGraw-Hill Valuing Common Stocks Dividend Discount Model - Computation of today’s stock price which states that share value equals the present value of all expected future dividends. H - Time horizon for your investment. P Div r Div r Div P r H H 0 H 1 1 2 2 1 1 1 = + + + + + + ( ) ( ) + ... ( )
5-10 Valuing Common Stocks Example Current forecasts are for Xyz Company to pay dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of$94. 48. What is the price of the stock given a 12% expected return? Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 5- 10 Irwin/McGraw-Hill Valuing Common Stocks Example Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12% expected return?