1、8-1Chapter OutlineChapter Outline Bond and Stock DifferencesBond and Stock Differences Common Stock ValuationCommon Stock Valuation Features of Common StockFeatures of Common Stock Features of Preferred StockFeatures of Preferred Stock The Stock MarketsThe Stock Markets8-2Chapter OutlineChapter Outl
2、ine Bond and Stock DifferencesBond and Stock Differences Common Stock ValuationCommon Stock Valuation Features of Common StockFeatures of Common Stock Features of Preferred StockFeatures of Preferred Stock The Stock MarketsThe Stock Markets8-3Bonds and Stocks:Bonds and Stocks:SimilaritiesSimilaritie
3、s Both provide long-term funding for Both provide long-term funding for the organizationthe organization Both are future funds that an Both are future funds that an investor must considerinvestor must consider Both have future periodic paymentsBoth have future periodic payments Both can be purchased
4、 in a Both can be purchased in a marketplace at a price“today”marketplace at a price“today”8-4Bonds and Stocks:Bonds and Stocks:DifferencesDifferences From the firms perspective:a bond From the firms perspective:a bond is a long-term debt and stock is is a long-term debt and stock is equityequity Fr
5、om the firms perspective:a bond From the firms perspective:a bond gets paid off at the maturity date;gets paid off at the maturity date;stock continues indefinitely.stock continues indefinitely.We will discuss the mix of bonds We will discuss the mix of bonds(debt)and stock(equity)in a(debt)and stoc
6、k(equity)in a future chapter entitled future chapter entitled capital capital structurestructure8-5Bonds and Stocks:Bonds and Stocks:DifferencesDifferences A bond has coupon payments and a A bond has coupon payments and a lump-sum payment;stock has lump-sum payment;stock has dividend payments foreve
7、rdividend payments forever Coupon payments are fixed;stock Coupon payments are fixed;stock dividends change or“grow”over dividends change or“grow”over timetime8-6A visual representation of A visual representation of a a bondbond with a coupon with a coupon payment(C)and a maturity payment(C)and a ma
8、turity value(M)value(M)12345$C$C1 1$C$C2 2$C$C3 3$C$C4 4$C$C5 5$M8-7A visual representation A visual representation of a of a share of common share of common stockstock with dividends(D)with dividends(D)foreverforever12345$D$D1 1$D$D2 2$D$D3 3$D$D4 4$D$D5 5$D8-8Comparison ValuationsComparison Valuat
9、ions123BondCCCMP00123Common StockD1D2D3DP008-9Notice these differences:Notice these differences:The“Cs”are constant and equalThe“Cs”are constant and equal The bond ends(year 5 here)The bond ends(year 5 here)There is a lump sum at the endThere is a lump sum at the end12345$C$C1 1$C$C2 2$C$C3 3$C$C4 4
10、$C$C5 5$M8-10Notice these differences:Notice these differences:The dividends are differentThe dividends are different The stock never endsThe stock never ends There is no lump sumThere is no lump sum12345$D$D1 1$D$D2 2$D$D3 3$D$D4 4$D$D5 5$D8-11Chapter OutlineChapter Outline Bond and Stock Differenc
11、esBond and Stock Differences Common Stock ValuationCommon Stock Valuation Features of Common StockFeatures of Common Stock Features of Preferred StockFeatures of Preferred Stock The Stock MarketsThe Stock Markets8-12Our Task:Our Task:To value a share To value a share of of Common StockCommon Stock8-
12、13And how will we And how will we accomplish our accomplish our task?task?8-148-15Just remember:Just remember:8-16Cash Flows for Cash Flows for StockholdersStockholdersIf you buy a share of If you buy a share of stock,you can receive stock,you can receive cash in two ways:cash in two ways:1.1.The co
13、mpany pays The company pays dividendsdividends2.You sell your 2.You sell your shares,either to shares,either to another investor in another investor in the market or back the market or back to the companyto the company8-17One-Period ExampleOne-Period ExampleReceiving Receiving one future one future
14、dividend dividend and one future and one future selling priceselling price of a share of a share of common stockof common stock8-18One-Period ExampleOne-Period ExampleSuppose you are thinking of Suppose you are thinking of purchasing the stock of Moore Oil,purchasing the stock of Moore Oil,Inc.You e
15、xpect it to pay a$2 Inc.You expect it to pay a$2 dividend in one year,and you dividend in one year,and you believe that you can sell the believe that you can sell the stock for$14 at that time.stock for$14 at that time.If you require a return of 20%on If you require a return of 20%on investments of
16、this risk,what is investments of this risk,what is the maximum you would be willing the maximum you would be willing to pay?to pay?8-19Visually this would look Visually this would look like:like:1D1=$2P1=$14R=20%8-20Compute the Present ValueCompute the Present Value1D1=$2P1=$14R=20%$1.67$11.67PV=$13
17、.341 year=N20%=Discount rate$2=Payment(PMT)$14=FVPV=?-13.341st2ndTI BA II PlusTI BA II Plus8-218-218-22$14=FV1 year=N$2=Payment(PMT)20%=Discount rate PV=?-13.34HP 12-CHP 12-C8-23Two Period ExampleTwo Period ExampleNow,what if you decide to hold Now,what if you decide to hold the stock for the stock
18、for twotwo years?In years?In addition to the dividend in one addition to the dividend in one year,you expect a dividend of year,you expect a dividend of$2.10 in two years and a stock$2.10 in two years and a stock price of$14.70 at the end of price of$14.70 at the end of year.Now how much would you b
19、e year.Now how much would you be willing to pay?willing to pay?8-24Visually this would look like:Visually this would look like:2D1=$2P2=$14.70R=20%1D2=$2.108-25Compute the Present ValueCompute the Present Value2D1=$2P2=$14.70R=20%1D2=$2.10$1.67$1.46$10.21$13.34=P08-26What is the Observed What is the
20、 Observed Pattern?Pattern?We value a share of stock We value a share of stock by bring back all expected by bring back all expected future dividends into future dividends into present value termspresent value terms8-27Future DividendsFuture DividendsSo the key is to So the key is to determine the de
21、termine the future future dividendsdividends when given when given the growth rate of the growth rate of those dividends,those dividends,whether the growth is whether the growth is zerozero,constantconstant,or,or unusual first and then unusual first and then levels off to a levels off to a constant
22、growth rateconstant growth rate.8-28So how do you compute the So how do you compute the future dividends?future dividends?Three scenarios:Three scenarios:1.1.A A constant dividend(zero growth)constant dividend(zero growth)2.2.The dividends change by a The dividends change by a constant constant grow
23、th rategrowth rate3.3.We have some We have some unusual growth unusual growth periods and periods and thenthen level off to a level off to a constant growth rateconstant growth rate8-29So how do you compute the So how do you compute the future dividends?future dividends?Three scenarios:Three scenari
24、os:1.1.A A constant dividend(zero growth)constant dividend(zero growth)2.2.The dividends change by a The dividends change by a constant growth rateconstant growth rate3.3.We have some We have some unusual growth unusual growth periods and periods and thenthen level off to a level off to a constant g
25、rowth rateconstant growth rate8-301.Constant Dividend 1.Constant Dividend Zero GrowthZero Growth The firm will pay a The firm will pay a constant dividend foreverconstant dividend forever This is like preferred This is like preferred stockstock The price is computed using The price is computed using
26、 the perpetuity formula:the perpetuity formula:P P0 0=D/R=D/R8-31So how do you compute the So how do you compute the future dividends?future dividends?Three scenarios:Three scenarios:1.1.A A constant dividend(zero growth)constant dividend(zero growth)2.2.The dividends change by a The dividends chang
27、e by a constant growth rateconstant growth rate3.3.We have some We have some unusual growth unusual growth periods and periods and thenthen level off to a level off to a constant growth rateconstant growth rate8-322.2.Constant Growth Rate Constant Growth Rate of Dividendsof DividendsDividends are ex
28、pected to grow at a Dividends are expected to grow at a constant percent per period.constant percent per period.P0=D1/(1+R)+D2/(1+R)2+D3/(1+R)3+P0=D0(1+g)/(1+R)+D0(1+g)2/(1+R)2+D0(1+g)3/(1+R)3+8-332.2.Constant Growth Rate Constant Growth Rate of Dividendsof DividendsWith a little algebra this reduce
29、s to:With a little algebra this reduces to:g-RDg-Rg)1(DP1008-342.2.Constant Growth Rate Constant Growth Rate of Dividendsof Dividendsg-RDg-Rg)1(DP100A.What happens if g R?A.What happens if g R?B.What happens if g=R?B.What happens if g=R?8-35Dividend Growth Model Dividend Growth Model(DGM)Assumptions
30、(DGM)AssumptionsTo use the Dividend Growth Model(aka To use the Dividend Growth Model(aka the Gordon Model),you must meet the Gordon Model),you must meet all all three requirementsthree requirements:1.1.The The growthgrowth of all future dividends of all future dividends must be must be constantcons
31、tant,2.2.The The growthgrowth raterate must be must be smallersmaller than than the the discount ratediscount rate(g R),and(g R),and3.3.The The growth rate growth rate must must notnot be equal to be equal to the the discount rate discount rate (g R)(g R)8-36DGM Example 1DGM Example 1Suppose Big D,I
32、nc.,just paid Suppose Big D,Inc.,just paid a dividend(Da dividend(D0 0)of$0.50 per)of$0.50 per share.It is expected to share.It is expected to increase its dividend by 2%increase its dividend by 2%per year.per year.If the market requires a If the market requires a return of 15%on assets of return of
33、 15%on assets of this risk,how much should the this risk,how much should the stock be selling for?stock be selling for?8-37DGM Example 1 DGM Example 1 SolutionSolutionP0=.50(1+.02).15 -.02g-RDg-Rg)1(DP100P0=.51 .13=$3.928-38DGM Example 2DGM Example 2Suppose Moore Oil Inc.,is Suppose Moore Oil Inc.,i
34、s expected to pay a$2 expected to pay a$2 dividend in one year.If dividend in one year.If the dividend is expected to the dividend is expected to grow at 5%grow at 5%per year per year and the and the required return is 20%,required return is 20%,what is the price?what is the price?8-39DGM Example 2
35、DGM Example 2 SolutionSolutionP0=2.00 .20 -.05g-RDg-Rg)1(DP100P0=2.00 .15=$13.348-40So how do you compute the So how do you compute the future dividends?future dividends?Three scenarios:Three scenarios:1.1.A A constant dividend(zero growth)constant dividend(zero growth)2.2.The dividends change by a
36、The dividends change by a constant constant growth rategrowth rate3.3.We have some We have some unusual growth unusual growth periods and periods and thenthen level off to a level off to a constant growth rateconstant growth rate8-413.3.Unusual Growth;Unusual Growth;Then Constant GrowthThen Constant
37、 GrowthJust draw the time line with the Just draw the time line with the unusual growth rates identified unusual growth rates identified and determine if/when you can use and determine if/when you can use the Dividend Growth Model.the Dividend Growth Model.Deal with the unusual growth Deal with the
38、unusual growth dividends dividends separately.separately.8-42Non-constant Growth Non-constant Growth Problem StatementProblem StatementSuppose a firm is expected to Suppose a firm is expected to increase dividends by 20%in one increase dividends by 20%in one year and by 15%for two years.year and by
39、15%for two years.After that,dividends will After that,dividends will increase at a rate of 5%per year increase at a rate of 5%per year indefinitely.indefinitely.If the If the lastlast dividend was$1 and dividend was$1 and the required return is 20%,what the required return is 20%,what is the price o
40、f the stock?is the price of the stock?8-43Non-constant Growth Non-constant Growth Problem StatementProblem StatementDraw the time line and compute each Draw the time line and compute each dividend using the corresponding dividend using the corresponding growth rate:growth rate:g=20%g=15%g=15%g=5%D0=
41、$1.001234D1D2D38-44Non-constant Growth Non-constant Growth Problem StatementProblem StatementDraw the time line and compute each Draw the time line and compute each dividend using the corresponding dividend using the corresponding growth rate:growth rate:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3D1=($1.0
42、0)(1+20%)=$1.00 x 1.20=$1.20=1.208-45Non-constant Growth Non-constant Growth Problem StatementProblem StatementDraw the time line and compute each Draw the time line and compute each dividend using the corresponding dividend using the corresponding growth rate:growth rate:g=20%g=15%g=15%g=5%D0=$1.00
43、1234D1D2D3D2=($1.20)(1+15%)=$1.20 x 1.15=$1.38=1.388-46Non-constant Growth Non-constant Growth Problem StatementProblem StatementDraw the time line and compute each Draw the time line and compute each dividend using the corresponding dividend using the corresponding growth rate:growth rate:g=20%g=15
44、%g=15%g=5%D0=$1.001234D1D2D3D3=($1.38)(1+15%)=$1.38 x 1.15=$1.59=1.598-47Non-constant Growth Non-constant Growth Problem StatementProblem StatementNow we can use the DGM starting with Now we can use the DGM starting with the period of the constant growth the period of the constant growth rate at our
45、 time frame of year 3:rate at our time frame of year 3:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3P3=D4/R g P3=D3(1+g)/R-gR=20%8-48Non-constant Growth Non-constant Growth Problem StatementProblem StatementNow we can use the DGM starting with Now we can use the DGM starting with the period of the constant
46、growth the period of the constant growth rate at our time frame of year 3:rate at our time frame of year 3:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3 P3=D3(1+g)/R-gP3=1.59(1.05)/.20-.05=$11.13R=20%8-49Non-constant Growth Non-constant Growth Problem StatementProblem StatementWe now have all of the dividen
47、ds accounted We now have all of the dividends accounted for and we can compute the present value for and we can compute the present value for a share of common stock:for a share of common stock:g=20%g=15%g=15%g=5%D0=$1.001234D1D2D3R=20%1.20 1.38 1.59P3=11.138-50Non-constant Growth Non-constant Growt
48、h Problem StatementProblem Statementg=20%g=15%g=15%g=5%D0=$1.001234D1D2D3R=20%1.20 1.38 1.59P3=11.13$9.328-51Stock Price Sensitivity Stock Price Sensitivity to Dividend Growth,gto Dividend Growth,gD1=$2;R=20%05010015020025000.050.10.150.2Growth RateStock PriceStock Price Sensitivity Stock Price Sens
49、itivity to Required Return,Rto Required Return,RD1=$2;g=5%05010015020025000.050.10.150.20.250.3Growth RateStock Price8-528-53Using the DGM to Find RUsing the DGM to Find RgPD gPg)1(D Rg-RDg-Rg)1(DP0100100Start with the DGM and then Start with the DGM and then algebraically rearrange the equation alg
50、ebraically rearrange the equation to solve for R:to solve for R:8-54Finding the Required Finding the Required Return-ExampleReturn-ExampleSuppose a firms stock is selling for Suppose a firms stock is selling for$10.50.It just paid a$1 dividend,and$10.50.It just paid a$1 dividend,and dividends are ex
