FIN 323 : Chapter 7 : Stock Evaluation ( Part 1 ) important
FIN 323 : Chapter 7 : Stock Evaluation ( Part 1 ) important FIN 323
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This 0 page Class Notes was uploaded by Winn on Friday February 26, 2016. The Class Notes belongs to FIN 323 at Marshall University taught by in Spring 2016. Since its upload, it has received 22 views. For similar materials see Principles of Finance in Business at Marshall University.
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Date Created: 02/26/16
Chapter 7 Stock Evaluation Part 1 1 The difference between bonds and stocks Bonds are a form of longterm debt in which the issuing corporation promises to pay the principal amount at a speci c date Stocks or shares of stock represent an ownership interest in a corporation Stock markets are Nasdaq Dow SampP 500 and AMEX These markets are regulated by the Securities Exchange CommissionSEC r e r rs 391 DW FIE rshi p eh efiE frem the grewth ehefiE frem the ihterest ef the eemlpnerw emum1er paid fer the learn Ilhterest pie wheer 3 re l39lr liEl tie ih the term at eeu puneh he whehE Fre are paid eut ih the term at diuirlehrls Bonds the companycorporation pays you every single period by coupon payment and gets a lump sum in the end of contract lower risk gt less money Stocks you earn the money by interest rate dividend increaseddecreased in certain period of time higher risk gt more money What is dividend a sum of money paid regularly typically quarterly by a company to its shareholders out of its pro ts or reserves OnePeriod example to calculate stock You want to purchase stock of Marshall Company you expect to earn 2 dividend and you think that you will sell at the price of 20 at that time If you require a return of 20 on the investments of this risk what is maximum you would be willing to pay We have 2 future value D1 2 P1 14 Calculate back to today by using nance calculator by the method of calculating future value back to present value we will have Do167 and P0 1167 gt Sum 1334 Twoperiod example Right now you wait until 2 years to sell stock and I already have dividend at year 1 and you expect a dividend of 21 in year 2 and at the stock price of 16 Now how much will you be willing to pay At this point we have D1 2 D2 dividend at year 2 21 and P2 16 Same as oneperiod solution use the nance calculator to calculate back to today We will have D0 167 146 dividend from year 2 and P0 1111 gt Sum 1424 2 Future dividends To know the future dividends when given the growth rate of those dividends whether the growth is zero constant or unusual rst and then levels off to a constant growth rate So how to compute the future dividends we will have 3 cases a constant dividend zero growth b dividends change by a constant growth rate c unexpected growth periods and then calculate the constant growth rate 3 Demonstrate 3 cases a Constant Dividend Zero Growth P D Firm will pay a constant dividend forever 0 r P0 2 Price Like preferred stock What IS preferred D 2 D ividend stock stock that entitles the holder to a xed r D iscoum Rate dividend whose payment takes priority over that of commonstock dividends b Constant Growth rate of dividends Common Stock Valuation ConstantGrth Model The eenstantgrewth medlel is a wideiy eited dividend a39ailuatien appre aeh that assumes that dividends willllll grew at a eenstant rate but a rate that is liess than the required li39eturn ii i as u I g IHM iii V j I m it all 1 illd H m The Garden medlel is a E l39i mi l name for the eenstantgrewth medell that is wideiy eited in distid end vailuatien DI jF39s i m m i l ie depth 2012 Pearson Edueation v49 Remember Rate is less than the required return c Unusual Growth Then Constant Growth popular one hardest one to calculate Eli E12 v g 4 H quot an 1 ark 1 533 quot w F n Marl minim E1 Iilm m E m i la Hqulm arrmm Ir a GO D LCK quot x V H L A El El H TwPerljnljl ll Pa 13 Ll H 39 5 5391 R Multi Perid DDM E 539 i391 f1 Hur nil rarle gl x n Example The current dividend on a stock is 2 per share and investors require a rate of return of 12 Dividends are expected to grow at a rate of 20 per year over the next three years and then at a rate of 5 per year from that point on Find the price of the stock There are 3 years of no constant growth thus T 3 Before substituting into the formula given above it is necessary to calculate the expected dividends for years 1 through 4 using the provided growth rates D1 3i13333333 D2 333l1333333 D3 333l13333333 D4 3333133j333333 333 333 3333 33333 113j 3 33333 131331 13132 131333 133935 FE If you don t understand try to draw the graph to show each period
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