Академический Документы
Профессиональный Документы
Культура Документы
share valuation
Chapter 7
7-2
Chapter outline
Ordinary share valuation
Some features of ordinary and
preference shares
The share markets
7-3
7-4
One-period example
Suppose you are thinking of
purchasing the stock of Moore Oil Inc.
You expect it to pay a $2 dividend in one
year.
You believe you can sell the stock for
$14 at that time.
You require a return of 20% on
investments of this risk.
What is the maximum you would be
willing to pay?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-5
One-period example
(cont.)
R = 20%
P1 = $14
Compute the PV of the expected cash flows
( 2 14 )
P0
$13.33
1.20
Calculator:
16 [FV]; 20 [I/Y]; 1 [N]; [CPT] [PV] = -13.33
7-6
Two-period example
$13.33
0
1.20
(1.20 )2
Calculator:
CF0 = 0; C01 = 2; F01 = 1; C02 = 16.80; F02 = 1;
[NPV]; I = 20; [CPT][NPV] = $13.33
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-7
Three-period example
What if you decide to hold the stock for three years?
In addition to the dividends at the end of years 1
and 2, you expect to receive a dividend of $2.205 at
the end of year 3 and a share price of $15.435.
Now how much would you be willing to pay?
P0
2
2.10
( 2.205 15.435 )
$13.33
2
3
1.20 (1.20)
(1.20)
Calculator:
7-8
7-9
Stock value = PV of
dividends
P0 =
D1
(1+R)1
+D
D2
(1+R)2
(1+R)
D3
+
3
(1+R)
+
Dt
P0
t
t 1 (1 R )
How can we estimate all future dividend
payments?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-10
Estimating dividends:
Special cases
Constant dividend
The firm will pay a constant dividend forever
This is like a preference share
The price is computed using the perpetuity
formula
Supernormal growth
Dividend growth is not consistent initially,
but settles down to constant growth
eventually
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-11
Zero growth
If dividends are expected at regular
intervals forever, this is like a
preference share and is valued as a
perpetuity
P0 = D/R
7-12
7-13
R
)
t 1
D 0 (1 g)
D1
P0
R -g
R -g
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-14
DGMExample 1
Suppose Outback Ltd just paid a
dividend of $0.50. It is expected to
increase its dividend by 2% per year. If
the market requires a return of 15% on
assets of this risk, how much should the
share be selling for?
D0 (1 g)
P0
D0= $0.50
Rg
g = 2%
R = 15%
0.50(1 .02)
P0
$3.92
.15 .02
7-15
DGMExample 2
Suppose Deep Pirates Ltd is expected to
pay a $2 dividend in one year. If the
dividend is expected to grow at 5% per
year and the required return is 20%,
what is the price?
D1 = $2.00
g = 5%
r = 20%
D1
P0
Rg
2.00
P0
$13.33
.20 .05
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-16
7-17
7-18
Example 7.3Gordon
Growth Company I
Gordon Growth Company is expected to pay a dividend
of $4 next period and dividends are expected to grow
at 6% per year. The required return is 16%.
What is the current price?
D1
P0
Rg
4.00
P0
$40
.16 .06
Remember that we already have the dividend
expected next year, so we dont multiply the dividend
by 1+g.
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-19
Example 7.3Gordon
Growth Company II
What is the price expected to be in
year 4?
P4 = D4(1 + g) / (R g) = D5 / (R g)
P4 = 4(1+.06)4 / (.16 - .06) = 50.50
7-20
7-21
Non-constant growth
problem statement
Suppose a firm is expected to increase
dividends by 20% in one year and by
15% in two years. After that dividends
will increase at a rate of 5% per year
indefinitely. If the last dividend was $1
and the required return is 20%, what is
the price of the share?
Remember that we have to find the PV
of all expected future dividends.
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-22
Non-constant growth
problemSolution
Compute the dividends until growth
levels of
D1 = 1(1.2) = $1.20
D2 = 1.20(1.15) = $1.38
D3 = 1.38(1.05) = $1.449
7-23
Non-constant +
Constant growth
Basic PV of all future dividends formula
D1
P0
1 R
D2
1 R
D3
1 R
D
...
1 R
Dividend growth
model
Dt 1
Pt
R g
7-24
Non-constant +
Constant growth
(cont.)
D1
D2
P2
P0
1
2
2
1 R 1 R (1 R)
Because
Dt
t
(
1
R
)
t 3
P2
7-25
Non-constant growth
followed by constant
growth
0 rs=20% 1
g = 20%
D0 = 1.00
g = 15%
1.20
g = 5%
1.38
1.449
1.0000
0.9583
6.7083
8.6667
= P0
^
P2 = $1.449 = $9.66
0.20
0.05
7-26
2.00
P0
$13.33
.15
2.00(1.03)
P0
$17.17
.15 .03
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-27
R-g
R-g
7-28
7-29
Summary of share
valuation
Table 7.1
7-30
Features of ordinary
shares
Voting rights
Stockholders elect directors
Cumulative voting vs straight
voting
Proxy voting
Classes of share
One share, one vote
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-31
Features of ordinary
shares (cont.)
Other rights
Share proportionally in declared
dividends
Share proportionally in remaining
assets during liquidation
Pre-emptive right
Right of first refusal to buy new stock
issue to maintain proportional
ownership if desired
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-32
Dividend
characteristics
Dividends are not a liability of the firm
until declared by the Board of Directors
A firm cannot go bankrupt for not
declaring dividends
7-33
Features of preference
shares
Dividends
Stated dividend must be paid before
dividends can be paid to ordinary
shareholders
Dividends are not a liability of the firm and
preference dividends can be deferred
indefinitely
Most preference dividends are cumulative
any missed preference dividends have
to be paid before ordinary dividends can
be paid
7-34
Dealers vs brokers
Dealer: Maintains an inventory
Ready to buy or sell at any time
Think Used car dealer
Broker: Brings buyers and sellers
together
Think Real estate broker
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
7-35
Australian Stock
Exchange (ASX)
Australian Stock Exchange (ASX)1987
Result of amalgamation of state-based exchanges
7-36
Orders
Limit orderspecified sell/buy price
Market orderat best market price
7-37
7-38
7-39
7-40
Chapter 7
END
7-41