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WALL STREET WEST WORKSHOP
Nov 2009
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OUTLINE
Introduction
Sources of Data
Stock valuation
Cost of Capital
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TERMINOLOGY
Investment Primary market Secondary market Value Income Capital Gain Return Rate of return Risk Speculation Marketability vs. Liquidity
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SOURCES OF DATA
Thomson Reuters
Bloomberg
Worldwide Web
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STOCK VALUATION
PV of all future dividends
1
1
10
10
)1(
)1(
)1(
)1(
n
nn
tt
t
tt
t
rgrgD
r
DP
r
DP
o Capital Asset Pricing Model
)( fmifi RRRR
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STOCK VALUATION - KEY INPUTS
Return Beta Risk Free Rate Market Risk Premium
Dividends EPS Payout ratio
Assumptions Goal Seek Problems
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WEIGHTED AVERAGE COST OF CAPITAL
The minimum rate of return that must be earned from investments to ensure the value of the firm does not decrease
sspspsdd kwkwTkwWACC )1(
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WEIGHTED AVERAGE COST OF CAPITAL - COMPONENTS After-tax cost of debt (kd(1-T))
Interest rate on debt less the tax savings
Cost should be based on new debt issued rather than existing debt
Cost of preferred stock (kps)
N
psps P
Dk
NOTE: PN is the price received after deducting flotation costs
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WEIGHTED AVERAGE COST OF CAPITAL - COMPONENTS Cost of equity (ks)
Opportunity cost Alternative measures:
Risk-free rate plus risk premiumCAPMBond yield plus risk premiumDiscounted cash flow
gP
Dk
gk
DP
s
s
0
1
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