Fundamentals of Financial Management-CHAPTER 9 Stocks and Their Valuation

1、9 - 1copyright 2001 by harcourt, inc.all rights reserved.chapter 9stocks and their valuationnfeatures of common stockndetermining common stock valuesnefficient marketsnpreferred stock9 - 2copyright 2001 by harcourt, inc.all rights reserved.nrepresents ownership.nownership implies control.nstockholde

2、rs elect directors.ndirectors elect management.nmanagements goal: maximize stock price.facts about common stock9 - 3copyright 2001 by harcourt, inc.all rights reserved.social/ethical questionshould management be equally concerned about employees, customers, suppliers, “the public,” or just the stock

3、holders?in enterprise economy, work for stockholders subject to constraints (environmental, fair hiring, etc.) and competition.9 - 4copyright 2001 by harcourt, inc.all rights reserved.nclassified stock has special provisions.ncould classify existing stock as founders shares, with voting rights but d

4、ividend restrictions.nnew shares might be called “class a” shares, with voting restrictions but full dividend rights.whats classified stock? how might classified stock be used?9 - 5copyright 2001 by harcourt, inc.all rights reserved.when is a stock sale an initial public offering (ipo)?a firm “goes

5、public” through an ipo when the stock is first offered to the public.9 - 6copyright 2001 by harcourt, inc.all rights reserved.average initial returns on ipos in various countriesmalaysia100%75%50%25%brazilportugaljapanswedenunited statescanada9 - 7copyright 2001 by harcourt, inc.all rights reserved.

6、ndividend growth modelnfree cash flow methodnusing the multiples of comparable firmsdifferent approaches for valuing common stock9 - 8copyright 2001 by harcourt, inc.all rights reserved.pdkdkdkdkssss01122331111. . .one whose dividends are expected togrow forever at a constant rate, g.stock value = p

7、v of dividendswhat is a constant growth stock?9 - 9copyright 2001 by harcourt, inc.all rights reserved.for a constant growth stockd1 = d0(1 + g)1d2 = d0(1 + g)2dt = dt(1 + g)tp0 = = .if g is constant, then:d0(1 + g)ks - gd1ks - g9 - 10copyright 2001 by harcourt, inc.all rights reserved. t0tg1dd tttk

8、1dpvd !p k,g if0 t0pvdp $0.25years (t)09 - 11copyright 2001 by harcourt, inc.all rights reserved.what happens if g ks?nif ks g and (2) g is expected to be constant forever.pdkggs01 requires ks9 - 12copyright 2001 by harcourt, inc.all rights reserved.assume beta = 1.2, krf = 7%, and km = 12%. what is

9、 the required rate of return on the firms stock?ks= krf + (km krf)bfirm = 7% + (12% 7%) (1.2) = 13%.use the sml to calculate ks:9 - 13copyright 2001 by harcourt, inc.all rights reserved.d0 was $2.00 and g is a constant 6%. find the expected dividends for the next 3 years, and their pvs. ks = 13%.012

10、.24722.3823g = 6%1.87611.7599d0 = 2.001.650913%2.129 - 14copyright 2001 by harcourt, inc.all rights reserved.= =whats the stocks market value? d0 = 2.00, ks = 13%, g = 6%.constant growth model:p0 = = d1ks g 0.13 0.06 $2.12$2.120.07$30.29.9 - 15copyright 2001 by harcourt, inc.all rights reserved.nd1

11、will have been paid, so expected dividends are d2, d3, d4 and so on. thus,could also find p1 as follows:ks g 0.13 0.06 p1 = = what is the stocks market value one year from now, p1?d2 $2.247= $32.10.p1 = p0(1.06) = $32.10. 9 - 16copyright 2001 by harcourt, inc.all rights reserved.find the expected di

12、vidend yield, capital gains yield, and total return during the first year.dividend yld = = =cap gains yld = = total return = 7.0% + 6.0% = 13.0%.d1p0p1 p0p0$30.29$2.12 7.0%.$32.10 $30.29$30.29= 6.0%.9 - 17copyright 2001 by harcourt, inc.all rights reserved.rearrange model to rate of return form:.pdk

13、gdpgs0110 to ksthen, ks= $2.12/$30.29 + 0.06= 0.07 + 0.06 = 13%.9 - 18copyright 2001 by harcourt, inc.all rights reserved.p0 = = = $15.38.what would p0 be if g = 0?the dividend stream would be a perpetuity.2.002.002.00012313%.pmtk$2.000.139 - 19copyright 2001 by harcourt, inc.all rights reserved.nca

14、n no longer use constant growth model.nhowever, growth becomes constant after 3 years.if we have supernormal growth of 30% for 3 years, then a long-run constant g = 6%, what is p0? k is still 13%.9 - 20copyright 2001 by harcourt, inc.all rights reserved.nonconstant growth followed by constantgrowth:

15、02.3012.6473.04546.1161234ks = 13%54.109 = p0g = 30%g = 30%g = 30%g = 6%d0 = 2.00 2.600 3.380 4.394 4.658.$66.54p34.658130 06 0.9 - 21copyright 2001 by harcourt, inc.all rights reserved.what is the expected dividend yield and capital gains yield at t = 0? at t = 4?div. yield0 = = 4.81%.cap. gain0 =

16、13.00% 4.81% = 8.19%.$2.60$54.119 - 22copyright 2001 by harcourt, inc.all rights reserved.nduring nonconstant growth, d/p and capital gains yield are not constant, and capital gains yield is less than g.nafter t = 3, g = constant = 6% = capital gains yield; k = 13%; so d/p = 13% 6% = 7%.9 - 23copyri

17、ght 2001 by harcourt, inc.all rights reserved.25.72suppose g = 0 for t = 1 to 3, and then g is a constant 6%. what is p0?01.771.571.3920.991234ks=13%g = 0%g = 0%g = 0%g = 6%2.00 2.00 2.00 2.00 2.12.p32.1200730.29. .9 - 24copyright 2001 by harcourt, inc.all rights reserved.t = 3: now have constant gr

18、owth with g = capital gains yield = 6% and d/p = 7%.$2.00$25.72what is d/p and capital gains yield at t = 0 and at t = 3?t = 0:d1p0 = = 7.78%.cgy = 13% 7.78% = 5.22%.9 - 25copyright 2001 by harcourt, inc.all rights reserved.if g = -6%, would anyone buy the stock? if so, at what price?firm still has

19、earnings and still paysdividends, so p0 0:pdkgd gkgss0101= $2.00(0.94) $1.880.13 (-0.06) 0.19= = = $9.89.9 - 26copyright 2001 by harcourt, inc.all rights reserved.what is the annual d/p and capital gains yield?capital gains yield = g = -6.0%,dividend yield= 13.0% (-6.0%) = 19%.d/p and cap. gains yie

20、ld are constant,with high dividend yield (19%) offsettingnegative capital gains yield.9 - 27copyright 2001 by harcourt, inc.all rights reserved.free cash flow methodnthe free cash flow method suggests that the value of the entire firm equals the present value of the firms free cash flows (calculated

21、 on an after-tax basis).nrecall that the free cash flow in any given year can be calculated as:nopat net capital investment.9 - 28copyright 2001 by harcourt, inc.all rights reserved.nonce the value of the firm is estimated, an estimate of the stock price can be found as follows:lmv of common stock (

22、market capitalization) = mv of firm mv of debt and preferred stock.lp = mv of common stock/# of shares.using the free cash flow method9 - 29copyright 2001 by harcourt, inc.all rights reserved.nfree cash flow method is often preferred to the dividend growth model-particularly for the large number of

23、companies that dont pay a dividend, or for whom it is hard to forecast dividends.issues regarding the free cash flow method(more.)9 - 30copyright 2001 by harcourt, inc.all rights reserved.nsimilar to the dividend growth model, the free cash flow method generally assumes that at some point in time, t

24、he growth rate in free cash flow will become constant.nterminal value represents the value of the firm at the point in which growth becomes constant.fcf method issues continued9 - 31copyright 2001 by harcourt, inc.all rights reserved.416.942fcf estimates for the next 3 years are -$5, $10, and $20 mi

25、llion, after which the fcf is expected to grow at 6%. the overall firm cost of capital is 10%. 0-4.5458.26415.026398.1971234k = 10%g = 6% -5 10 2021.2021.200.04.*tv3 represents the terminal value of the firm, at t = 3.530 = = *tv39 - 32copyright 2001 by harcourt, inc.all rights reserved.if the firm

26、has $40 million in debt and has 10 million shares of stock, what is the price per share?value of equity = total value value of debt = $416.94 $40 = $376.94 million.price per share = value of equity/# of shares = $376.94/10 = $37.69.9 - 33copyright 2001 by harcourt, inc.all rights reserved.n analysts

27、 often use the following multiples to value stocks:lp/elp/cflp/saleslp/customern example: based on comparable firms, estimate the appropriate p/e. multiply this by expected earnings to back out an estimate of the stock price.using the multiples of comparable firms to estimate stock price9 - 34copyri

28、ght 2001 by harcourt, inc.all rights reserved.in equilibrium, stock prices are stable.there is no general tendency for people to buy versus to sell.in equilibrium, expected returns mustequal required returns:what is market equilibrium?ks = d1/p0 + g = ks = krf + (km krf)b.9 - 35copyright 2001 by har

29、court, inc.all rights reserved.ks = d1/p0 + g = ks = krf + (km krf)b.expected returns are obtained by estimating dividends and expected capital gains (which can be found using any of the three common stock valuation approaches).required returns are obtained from the capm.9 - 36copyright 2001 by harc

30、ourt, inc.all rights reserved.how is equilibrium established?if ks = + g ks, thenp0 is “too low” (a bargain).buy orders sell orders;p0 bid up; d1/p0 falls untild1/p0 + g = ks = ks.d1p09 - 37copyright 2001 by harcourt, inc.all rights reserved.why do stock prices change?1. ki could change: ki = krf +

31、(km krf )bi. krf = k* + ip.2. g could change due to economic or firm situation.p0 = d1ki g9 - 38copyright 2001 by harcourt, inc.all rights reserved.whats the efficient market hypothesis?emh: securities are normally in equilibrium and are “fairly priced.” one cannot “beat the market” except through g

32、ood luck or better information.9 - 39copyright 2001 by harcourt, inc.all rights reserved.1. weak-form emh:cant profit by looking at past trends. a recent decline is no reason to think stocks will go up (or down) in the future. evidence supports weak-form emh, but “technical analysis” is still used.9

33、 - 40copyright 2001 by harcourt, inc.all rights reserved.2. semistrong-form emh:all publicly available information is reflected in stock prices, so doesnt pay to pore over annual reports looking for undervalued stocks. largely true, but superior analysts can still profit by finding and using new information.9 - 41cop