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Security Valuation
In general, the intrinsic value of an asset = the present value of the stream of expected cash flows discounted at an appropriate required rate of return.
Preferred Stock
A hybrid security: its like common stock - no fixed maturity.
Preferred Stock
A hybrid security: its like common stock - no fixed maturity.
technically, its part of equity capital.
Preferred Stock
A hybrid security: its like common stock - no fixed maturity.
technically, its part of equity capital.
Preferred Stock
A hybrid security: its like common stock - no fixed maturity.
technically, its part of equity capital.
V =
Dp kp
Where, D p = stated annual dividend per share of Preferred stock and k p= discount rate.
Example:
Xerox preferred pays an 8.25% dividend on a $50 par value. Suppose our required rate of return on Xerox preferred is 9.5%.
Example:
Xerox preferred pays an 8.25% dividend on a $50 par value. Suppose our required rate of return on Xerox preferred is 9.5%.
$ 4.125 .095
Example:
Xerox preferred pays an 8.25% dividend on a $50 par value. Suppose our required rate of return on Xerox preferred is 9.5%.
$ 4.125 .095
$43.42
kp =
D Po
Example
If we know the preferred stock price is $40, and the preferred dividend is $4.125, the expected return is:
Example
If we know the preferred stock price is $40, and the preferred dividend is $4.125, the expected return is:
kp =
D Po
4.125 = 40
Example
If we know the preferred stock price is $40, and the preferred dividend is $4.125, the expected return is:
kp =
D Po
4.125 = .1031 40
Common Stock
is a variable-income security.
dividends may be increased or decreased, depending on earnings.
represents equity or ownership. includes voting rights. Limited liability: liability is limited to amount of owners investment. Priority: lower than debt and preferred.
The value of a share of common stock can be viewed As the discounted value of all expected cash dividends Provided by the issuing firm until the end of time.
Vcs =
S
n
t=1
Dt (1 + k e )t
Pn (1 + k e)n
Where, D t = cash dividend at end of period t and ; k e = investors required return, or capitalization rate, for this equity investment. P n = expected sales price of stock at end of n years.
5.50 + 120
Solution:
Vcs =
D1 k e- g
Assumes common stock dividends will grow at a constant rate into the future.
Vcs =
D1
k e-g
Example
XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15%?
Example
XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15%?
Example
XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15%?
Vcs =
Example
XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15%?
Vcs =
D1
ke - g
Example
XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15%?
Vcs =
D1
ke - g
5.50
.15 - .10
Example
XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15%?
Vcs =
D1
ke - g
5.50
.15 - .10
= $110
Vcs =
D ke- g
ke =
D1 Vcs
) + g
Vcs =
D ke-g
ke =
D1 Po
) + g
Example
We know a stock will pay a $3.00 dividend at time 1, has a price of $27 and an expected growth rate of 5%.
Example
We know a stock will pay a $3.00 dividend at time 1, has a price of $27 and an expected growth rate of 5%.
ke =
D1 Po
) + g
Example
We know a stock will pay a $3.00 dividend at time 1, has a price of $27 and an expected growth rate of 5%.
ke =
ke = (
D1 Po
) + g
=
3.00 27
) + .05
Example
We know a stock will pay a $3.00 dividend at time 1, has a price of $27 and an expected growth rate of 5%.
ke =
ke = (
D1 Po
) + g
= 16.11%
3.00 27
) + .05