Ch。8: Stock valuation Stock Market @2002. Prentice Hall. Inc
© 2002, Prentice Hall, Inc. Ch. 8: Stock Valuation
Security valuation 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
Security Valuation • 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 it's like common stock-no fixed maturity
Preferred Stock A hybrid security: • it’s like common stock - no fixed maturity
Preferred Stock a hybrid security it's like common stock-no fixed maturity. technically, it's part of equity capital
Preferred Stock A hybrid security: • it’s like common stock - no fixed maturity. – technically, it’s part of equity capital
Preferred Stock a hybrid security it's like common stock-no fixed maturity. technically, it's part of equity capitaL. it's like debt-preferred dividends are fixed
Preferred Stock A hybrid security: • it’s like common stock - no fixed maturity. – technically, it’s part of equity capital. • it’s like debt - preferred dividends are fixed
Preferred Stock a hybrid security it's like common stock-no fixed maturity. technically, it's part of equity capitaL. it's like debt-preferred dividends are fixed missing a preferred dividend does not constitute default, but preferred dividends are cumulative
Preferred Stock A hybrid security: • it’s like common stock - no fixed maturity. – technically, it’s part of equity capital. • it’s like debt - preferred dividends are fixed. – missing a preferred dividend does not constitute default, but preferred dividends are cumulative
Preferred stock Usually sold for $25, $50, or $100 per share。 Dividends are fixed either as a dollar amount or as a percentage of par value Example: In 1988, Xerox issued $75 million of.25% preferred stock at $50 per share. S4.125 is the fixed, annual dividend per share
• Usually sold for $25, $50, or $100 per share. • Dividends are fixed either as a dollar amount or as a percentage of par value. • Example: In 1988, Xerox issued $75 million of 8.25% preferred stock at $50 per share. – $4.125 is the fixed, annual dividend per share. Preferred Stock
Preferred Stock Features Firms may have multiple classes of preferreds, each with different features Priority: lower than debt, higher than common stock。 Cumulative feature: all past unpaid preferred stock dividends must be paid before any common stock dividends are declared
• Firms may have multiple classes of preferreds, each with different features. • Priority: lower than debt, higher than common stock. • Cumulative feature: all past unpaid preferred stock dividends must be paid before any common stock dividends are declared. Preferred Stock Features
Preferred Stock Features Protective provisions are common Convertibility: many preferreds are convertible into common shares Adjustable rate preferreds have dividends tied to interest rates Participation: some(very few) preferreds have dividends tied to the firms earnings
• Protective provisions are common. • Convertibility: many preferreds are convertible into common shares. • Adjustable rate preferreds have dividends tied to interest rates. • Participation: some (very few) preferreds have dividends tied to the firm’s earnings. Preferred Stock Features
Preferred Stock Features PIK Preferred: Pay-in-kind preferred stocks pay additional preferred shares to investors rather than cash dividends Retirement: Most preferreds are callable, and many include a sinking fund provision to set cash aside for the purpose of retiring preferred shares
• PIK Preferred: Pay-in-kind preferred stocks pay additional preferred shares to investors rather than cash dividends. • Retirement: Most preferreds are callable, and many include a sinking fund provision to set cash aside for the purpose of retiring preferred shares. Preferred Stock Features