1、5-1CHAPTER 5Stocks and Their ValuationnFeatures of common stocknDetermining common stock valuesnEfficient marketsnPreferred stock5-2nRepresents ownership.nOwnership implies control.nStockholders elect directors.nDirectors hire management.nSince managers are“agents”of shareholders,their goal should b
2、e:Maximize stock price.Common Stock:Owners,Directors,and Managers5-3nClassified stock has special provisions.nCould classify existing stock as founders shares,with voting rights but dividend restrictions.nNew shares might be called“Class A”shares,with voting restrictions but full dividend rights.Wha
3、ts classified stock?How might classified stock be used?5-4nThe dividends of tracking stock are tied to a particular division,rather than the company as a whole.lInvestors can separately value the divisions.lIts easier to compensate division managers with the tracking stock.n But tracking stock usual
4、ly has no voting rights,and the financial disclosure for the division is not as regulated as for the company.What is tracking stock?5-5When is a stock sale an initial public offering(IPO)?nA firm“goes public”through an IPO when the stock is first offered to the public.nPrior to an IPO,shares are typ
5、ically owned by the firms managers,key employees,and,in many situations,venture capital providers.5-6What is a seasoned equity offering(SEO)?nA seasoned equity offering occurs when a company with public stock issues additional shares.nAfter an IPO or SEO,the stock trades in the secondary market,such
6、 as the NYSE or Nasdaq.5-7nDividend growth modelnUsing the multiples of comparable firmsnFree cash flow method(covered in Chapter 12)Different Approaches for Valuing Common Stock5-8 ssssrDrDrDrDP1.1113322110One whose dividends are expected togrow forever at a constant rate,g.Stock Value=PV of Divide
7、ndsWhat is a constant growth stock?5-9For a constant growth stock,DDgDDgDDgttt101202111 grDgrgDPss 1001If g is constant,then:5-10 DDgtt 01 tttrDPVD 1!P r,g 0 IfPPVDt0$0.25Years(t)05-11What happens if g rs?nIf rs 0:grDgrgDPss 1001=$9.89.$2.00(0.94)0.13-(-0.06)$1.880.195-29What are the annual dividend
8、and capital gains yield?Capital gains yield=g=-6.0%.Dividend yield=13.0%-(-6.0%)=19.0%.Both yields are constant over time,with the high dividend yield(19%)offsetting the negative capital gains yield.5-30n Analysts often use the P/E multiple(the price per share divided by the earnings per share)or th
9、e P/CF multiple(price per share divided by cash flow per share,which is the earnings per share plus the dividends per share)to value stocks.n Example:lEstimate the average P/E ratio of comparable firms.This is the P/E multiple.lMultiply this average P/E ratio by the expected earnings of the company
10、to estimate its stock price.Using the Stock Price Multiples to Estimate Stock Price5-31n The entity value(V)is:lthe market value of equity(#shares of stock multiplied by the price per share)lplus the value of debt.n Pick a measure,such as EBITDA,Sales,Customers,Eyeballs,etc.n Calculate the average e
11、ntity ratio for a sample of comparable firms.For example,lV/EBITDAlV/CustomersUsing Entity Multiples5-32n Find the entity value of the firm in question.For example,lMultiply the firms sales by the V/Sales multiple.lMultiply the firms#of customers by the V/Customers ration The result is the total val
12、ue of the firm.n Subtract the firms debt to get the total value of equity.n Divide by the number of shares to get the price per share.Using Entity Multiples(Continued)5-33n It is often hard to find comparable firms.n The average ratio for the sample of comparable firms often has a wide range.lFor ex
13、ample,the average P/E ratio might be 20,but the range could be from 10 to 50.How do you know whether your firm should be compared to the low,average,or high performers?Problems with Market Multiple Methods5-34Why are stock prices volatile?grD0Ps1n rs=rRF+(RPM)bi could change.l Inflation expectations
14、l Risk aversionl Company risk n g could change.5-35Stock value vs.changes in rs and gD1=$2,rs=10%,and g=5%:P0=D1/(rs-g)=$2/(0.10-0.05)=$40.What if rs or g change?ggg rs4%5%6%9%40.0050.0066.6710%33.3340.0050.0011%28.5733.3340.005-36Are volatile stock prices consistent with rational pricing?n Small ch
15、anges in expected g and rs cause large changes in stock prices.n As new information arrives,investors continually update their estimates of g and rs.n If stock prices arent volatile,then this means there isnt a good flow of information.5-37What is market equilibrium?In equilibrium,stock prices are s
16、table.There is no general tendency for people to buy versus to sell.The expected price,P,must equal the actual price,P.In other words,the fundamental value must be the same as the price.(More)5-38In equilibrium,expected returns mustequal required returns:rs=D1/P0+g=rs=rRF+(rM-rRF)b.5-39How is equili
17、brium established?If rs=+g rs,then P0 is“too low.”If the price is lower than the fundamental value,then the stock is a“bargain.”Buy orders will exceed sell orders,the price will be bid up,and D1/P0 falls until D1/P0+g=rs=rs.D1P05-40Why do stock prices change?10grDPi n ri=rRF+(rM-rRF)bi could change.
18、l Inflation expectationsl Risk aversionl Company risk n g could change.5-41Whats the Efficient MarketHypothesis(EMH)?Securities are normally in equilibrium and are“fairly priced.”One cannot“beat the market”except through good luck or inside information.(More)5-421.Weak-form EMH:Cant profit by lookin
19、g 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.5-432.Semistrong-form EMH:All publicly available information is reflected in stock prices,so it doesnt pay to pore over annual reports
20、looking for undervalued stocks.Largely true.5-443.Strong-form EMH:All information,even inside information,is embedded in stock prices.Not true-insiders can gain by trading on the basis of insider information,but thats illegal.5-45Markets are generally efficient because:1.100,000 or so trained analys
21、ts-MBAs,CFAs,and PhDs-work for firms like Fidelity,Merrill,Morgan,and Prudential.2.These analysts have similar access to data and megabucks to invest.3.Thus,news is reflected in P0 almost instantaneously.5-46Preferred StocknHybrid security.nSimilar to bonds in that preferred stockholders receive a f
22、ixed dividend which must be paid before dividends can be paid on common stock.nHowever,unlike bonds,preferred stock dividends can be omitted without fear of pushing the firm into bankruptcy.5-47Whats the expected return on preferred stock with Vps=$50 and annual dividend=$5?%.0.1010.050$5$5$50$pspspsrrV
