博迪教学课件09

Chapter9:

Valuationof CommonStocksObjectiveExplainequityevaluationusingdiscountingDividendpolicyandwealth1Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallChapter9Contents9.1Readingstocklistings9.2Thediscounteddividendmodel9.3Earningandinvestmentopportunity9.4Areconsiderationoftheprice/earningsmultipleapproach9.5Doesdividendpolicyaffectshareholderwealth?2Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall9.1ReadingStockListingsThefollowingnewspaperstocklistingisusuallyprintedasahorizontalstringofinformationThelistingisforIBM,whichistradedontheNewYorkStockExchange3Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallReadingStockListings4Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallReadingStockListingsHi=1231/8:Thehighestpricethestockhastradedatoverthelast52weeksLo=931/8:Thelowestpricethestockhastradedatoverthelast52weeksStock=IBM:Thestock’snameSym=IBM:Thestock’ssymbol5Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallReadingStockListingsDiv=4.84:Thelastquarterlydividendmultipliedby4Yld%=4.2:Dividendyield;(Annualizeddividend÷stockprice)PE=16:Price-to-earnings;(Latestprice÷last4actualdividends)Vol100s=14591*100;Volumeofexchangetradedshares6Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallReadingStockListingsHi=115:HighestsharepriceofthedayLo=113:LowestsharepriceofthedayClose=1143/4:DaysclosingsharepriceChg=13/8:Changeinclosingpricefromprevioustradingday7Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallObservationItisusualtotradesharesinroundlotsof100sharesIfyoudecidetotradesharesasoddlotsyouwillpayhighercommissionsStocksplitsandstockdividendscancauseyoutoholdoddlots8Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall9.2TheDiscountedDividendModel

Adiscounteddividendmodelisanymodelthatcomputesthevalueofashareofastockasthepresentvalueoftheexpectedfuturecashdividends9Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallEquivalenceofHPRandNPVThebookstartsfromtheholdingperiodreturn,andusesaninductiveargumenttoderivetheNPVmethodforevaluatingstocksEquivalently,westartwiththediscountedcashflowmodel,andobtaintheholdingperiodreturn10Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallNotationPjisthestockvalueinyearjDjisthecashdividendinyearjKistherequiredrateofreturnonthestock11Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallPresentValueofDividends12Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallExpectedRateofReturnThepriceanddividendnextyearareexpectedprices,soTheexpectedrateofreturninanyperiodequalsthemarketcapitalizationrate,k13Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallRateRelationshipThisrelationshiptellsyouthatnextyear’sexpecteddividendyield+theexpectedcapitalgainyieldisequaltotherequiredrateofreturn14Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallPrice0IsDiscountedExpected(Dividend1+Price1)Priceisthepresentvalueoftheexpecteddividendplustheend-of-yearpricediscountedattherequiredrateofreturn15Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallEaseofUseEstimatingnextyear’sdividendisstraightforward,butestimatingnextyear’spriceappearstobemuchmoredifficultTheproblemisthatnextyear’spriceisobtained(eventually)byestimating,anddiscounting,everyfuturedividend16Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallEaseofUseWehavetointroduceasimplifyingassumptionthatcapturesourunderstandingofdividendbehaviorThesecondsimplestassumptionisthatadividendinanyfutureyearisthedividendintheprioryeartimesaconstantgrowthfactor(1+g)17Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallEaseofUseThinkofthisassomekindofdividendinflationFromchapter5weknowthatifkisthenominaldiscountrate,thentherealdiscountrate,R,isgivenbyR=(1+k)/(1+g)-118Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallEaseofUseRecallfromchapter4that,foraperpetuity,thepresentvalueistherealvalueofthefirstcashflowdividedbytherealrate19Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallPuttingThisTogether20Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallSolvingforK

21Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallG=CapitalGainsYieldComparingpriorresults:22Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallConclusionThecapitalgainsyieldisequaltothedividendgrowthrate23Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallGeneralizationThismodelcapturesmanyofthecharacteristicsofdividendcashflowsYoucouldnextassumethattherateofgrowth,g1,isvalidfroma1tob1,followedbyg2froma2(=b1+1)tob2,...Justlikethefolkinchapter5,businessesgrow,mature,anddecay24Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallMoreGeneralModelsChapter5containsanalternativederivationofgrowingperpetuityformulaItalsocontainstheequations,Excelworkbooks,andworkedexamplesforgrowingannuitymodelsofcommonstock25Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall9.3EarningandInvestmentOpportunityAsecondapproachtoDCFvaluationfocusesonfutureearningsandinvestmentopportunitiesThisfocus,ratherthantheearlierdividendfocus,concentratestheanalyst’sattentiononthecorebusinessdeterminantsofvalue26Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallCashFlowStatementsInchapter3wereviewedcashflowstatements.Algebraically,Netincome+depreciation-increasedworkingcapital-increaseP&E-dividends+increaseindebt-increaseininvestmentinmarketablesecurities=027Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallCashFlowStatementsWesimplifythisByrollingchangesinworkingcapital,andP&E,intochangeininvestmentsByassumingpureequityfunding(nodebt)ByassumingnomarketablesecuritiesNetincome+depreciation-dividends-changeininvestments=028Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallCashFlowStatementsWewanttoretainnetincomeasanaccountingentityinordertomaketheanalysisusefulDepreciationis“accountingdepreciation”andnotmarketvalueattrition.(Assumethesehappentobeequal)Definenetnewinvestmentsasnewinvestments-depreciation29Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallEarningandInvestmentOpportunityTosimplifytheanalysis,supposethatnonewsharesareissued,andnotaxesDividends=earnings-netnewinvestment“D=E-I”.Theformulaforvaluingstockis30Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallInterpretationThevalueofacompanyisnotequaltothepresentvalueofitsexpectedearnings31Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallInterpretationNetnewinvestmentmaybepositiveornegativeThelossofexistingassetvaluemaynotalwaysbecompensatedbynewinvestmentEarningsarewhataccountantsunderstandbytheterm,namelynetincomeafterinterestandtaxWearefinancefolk,buttheaccountantsprovidetheinformation32Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallNogrowthNogrowthCohasapolicyofnonetnewinvestmentsThisdoesnotmeanthefirmdoesnotinvestinnewplantandequipment--onlythatpurchasesmatchthelossofvalueoftheexistingassets(asmeasuredbydepreciation)Ifweassumeeverythingisinrealterms,itisreasonabletoassumethatNogrowthwillpayaconstant(say)$15/shareeachyear33Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallNogrowthIftherealcapitalizationrateis15%,thenthevalueofNogrowthis15/0.15=$10034Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallGrowthStockGrowthstockCoinitiallyhasthesameearningsasNogrowth,butreinvests60%ofitsearningseachyearintonewinvestmentsthatyieldarealrateofreturnof20%peryear35Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallGrowthStockThemanagementofGrowthstockmaybethoughtofastaking60%oftheshareholder’svalue,andreinvestingitonbehalfoftheshareholdersThatistheshareholdershave$100*0.4=$40ofthevalueoftheoldstream,andmanagementinveststheremaining$100*0.6=$6036Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallGrowthStockThefirstcashflowistheresultofinvesting$15*0.6=$9inyear1toobtain$15*0.6*0.20=$1.8foreverInyear1thishasavalueof$1.8/0.15=$12Thereisasecond,third,fourth,…flowstartinginyear3,4,5,…also$12Thepresentvalueofthesestreamsis12/0.15=$8037Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallGrowthStockMagicManagementhastakenshareholdervalueof$60andturneditinto$80Themagicdoesnotstophere.Managementwilltake60%ofthenewcashflowsandreinvestthemtoreturna80/60rewardtotheshareholders,andreinvest60%ofthoseThewealthoftheshareholderswillbecomeprogressivelymultiplied38Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallGrowthStockOriginalwealthKeptReinvestedWealthMultiplier39Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallGrowthStock40Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallGeneralizeLettheV=valueoftheshareswithoutreinvestmentG=thegrowthfromnewinvestmentR=retentionratioM=wealthmultiplier=g/iWealthg=wealth0*(1-r)/(1-w*r)41Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallObservationIfmanagementhadselectedaslightlyhigherretentionratior=i/g=0.20/0.15=0.75,thenthevalueofthecompanygoestoinfinityWhenthiskindofthinghappensinfinance,itisasignthatsomethinghasbeenmissedoutoftheanalysisTherequiredrateofreturndemandedbyinvestorsmayneedtobeincreased42Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallAlternativeSolutionMethodRecognizingthatG=changeinearnings÷earnings =(netinvestment÷earnings)*(Changeinearnings÷netinvestment)Growthisthentheproductoftheearnings-retentionrateandtherateofreturnonnewinvestmentPricegrowth=6÷(0.15-(0.6*0.2))=$20043Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallAlternativeSolutionMethodTheincreaseinthevalueofthestockistheconsequenceofreinvestmentatahigherrateofreturnthantheinvestorrequiredrateofreturnNormalgrowthhasinvestmentopportunitiesof15%,butstillreinvests60%oftheearnings44Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallReinvestmentUnderNormalGrowthRetentionRatioGrowthRateCostofCapital45Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallReinvestmentUnderNormalGrowthInthiscasethereisnoincreasedvaluetotheshareholders46Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallNogrowthandNormalprofit47Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallAReconsiderationofthePriceMultipleApproach

RecalltheP0=e1/k+NPVoffutureinvestmentsIntermsofP/EP0/

E1=1/k+NPV/E1offutureinvestmentsFirmswithhighPEratiosaretheninterpretedashavinglowcapitalizationratesorexcellentfutureinvestmentopportunities48Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallDoesDividendPolicyAffectShareholderWealth?

DividendpolicyofacorporationThepolicyregardingpayingoutcashtoitsshareholders,holdingconstantitsinvestmentandborrowingdecisions49Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall9.4ReconsiderationofthePrice/EarningsMultipleApproachTheformulaforagrowingperpetuityis:50Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall9.5DoesDividendPolicyAffectShareholderWealth?

Inafrictionlessworldwheretherearenotaxesnortransactioncosts,thedividendpolicy(asdefinedinthelastslide)willhavenoaffectonthewealthofstockholdersWeshallexamine:tax,regulations,costofexternalfinancing,andinformationcontentofdividends51Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallCashDividendsandShareRepurchasesAcorporationmaydistributecashBypayingdividendsAllshareholdersarepaidthesamepershareByrepurchasingitsownstockShareholderschoosingtoliquidatesomeoralloftheirholdingssellthesharesatmarketprice(astheynormallydo),andthecompanymakesmarketpurchases52Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:DividendPaymentThefollowingtableshowsasimplifiedbalancesheetofCashrichCoAssumeNumberofsharesoutstanding=500,000Shareprice=$2053Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:Dividends54Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:DividendPaymentIfCashrichdeclaresadividendof$2/shareitwillpay500,000*$2=$1,000,000Givenitslevelofrisk,thepaymentwillreducethemarketvalueofthesharesby$1,000,000to$20*500,000-$1,000,000=$9,000,000,soeachsharewillbeworth$9,000,000/500,000=$18/share55Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:DividendPaymentWas2Was10Were12Were1256Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:DividendPaymentBeforethedividend,everysharewasworth$20Afterthe$2/sharedividend,everysharewasworth$18ConclusionShareholderswealthisunchanged57Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:ShareRepurchaseTheoriginalbalanceisshownbelowSharepriceisstill$20Numberofsharesoutstandingis500,00058Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:ShareRepurchase59Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:ShareRepurchaseThecompanyrepurchases50,000sharesat$20pershare=$1,000,000Themarketvalueofthefirmisnow$10,000,000lessthelossof$1,000,000cash,or$9,000,000Thenumberofsharesoutstandingisnow500,000-50,000=450,00060Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:ShareRepurchaseThesharepriceisthen$9,000,000/450,000=$20ThewealthoftheshareholderswhosoldoutisunchangedThewealthoftheshareholderswhoheldthestockisunchanged61Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallIllustration:ShareRepurchaseWas2Was10Were12Were1262Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallStockDividendsCorporationssometimesdeclareastocksplitanddistributestockdividendsTheseactivitiesdonotdistributecashtotheshareholdersTheyincreasethenumberofissuedshares,butdonotchangethe%ofthecompanyeachshareholderownsTheydonotaffectshareholderwealth63Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHallModiglianiandMillerInafrictionlessenvironment,wheretherearenocostsofissuingnewsharesofstock,norcostsofrepurchasingexistingshares,afirm’sdividendpolicycanhavenoeffectonthewealthofcurrentshareholders64Copyright©2009PearsonEducation,Inc.Pub