L6 stock valuation

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1、Howtopricebondandstocks(con’t)BoSun0HowtoValueBondsandStocks?UseNetPresentValueApproach(NPV)tovaluebondsandstocks.FirstPrinciples:•Valueoffinancialsecurities=PVofexpectedfuturecashflowsTovaluebondsandstocksweneedto:•Estimatefuturecashflows:size(howmuch)andtim

2、ing(when)•DiscountfuturecashflowsatanappropriaterateBondsStocksDividends+CapitalgainsAbondisacertificateshowingthataborrowerowesaspecifiedsum.•Zero-growth•Fixedprincipal•constant-growthFixedfuturecashflows•differentialgrowth•fixedrate•floatingrate1ThePVofComm

3、onStocks•Thevalueofanyassetisthepresentvalueofitsexpectedfuturecashflows.•Stockownershipproducescashflowsfrom:–Dividends–CapitalGains•ValuationofDifferentTypesofStocks–ZeroGrowth–ConstantGrowth–DifferentialGrowth2Case1:ZeroGrowth•Assumethatdividendswillremain

4、atthesamelevelforeverDivDivDiv123xSincefuturecashflowsareconstant,thevalueofazerogrowthstockisthepresentvalueofaperpetuity:DivDivDiv123P0123(1R)(1R)(1R)DivP0R3Case2:ConstantGrowthAssumethatdividendswillgrowataconstantrate,g,forever,i.e.,DivDiv(1g)102

5、DivDiv(1g)Div(1g)2103DivDiv(1g)Div(1g)320...Sincefuturecashflowsgrowataconstantrateforever,thevalueofaconstantgrowthstockisthepresentvalueofagrowingperpetuity:Div1P0Rg4ConstantGrowthExample•SupposeBigD,Inc.,justpaidadividendof$.50.Itisexpectedtoincreasei

6、tsdividendby2%peryear.Ifthemarketrequiresareturnof15%onassetsofthisrisklevel,howmuchshouldthestockbesellingfor?•P=.50(1+.02)/(.15-.02)=$3.9205Case3:DifferentialGrowth•Assumethatdividendswillgrowatdifferentratesintheforeseeablefutureandthenwillgrowataconstantr

7、atethereafter.•TovalueaDifferentialGrowthStock,weneedto:–Estimatefuturedividendsintheforeseeablefuture.–EstimatethefuturestockpricewhenthestockbecomesaConstantGrowthStock(case2).–Computethetotalpresentvalueoftheestimatedfuturedividendsandfuturestockpriceatthe

8、appropriatediscountrate.6Case3:DifferentialGrowthxAssumethatdividendswillgrowatrategforN1yearsandgrowatrategthereafter.2DivDiv(1g)1012DivDiv(1g)Div(1g)21101...NDivDiv(1g)Div(1g)NN11