slide 1 stock valuation preferred stock features valuation expected return on a preferred stock...
TRANSCRIPT
Slide 1
Stock Valuation Preferred Stock
Features Valuation Expected return on a preferred stock
Common Stock Characteristics Valuation – single and multiple periods Expected return on a common stock
Sources of change in stock prices
Slide 2
Stock Valuation In general, the intrinsic value of an asset is the
present value of the stream of expected cash flows discounted at an appropriate required rate of return.
Slide 3
Preferred Stock A hybrid security:
it’s like common stock – no fixed maturity technically, it’s part of equity capital
it’s like debt – preferred dividends are fixed missing a preferred dividend does not constitute default, but
preferred dividends are cumulative Usually sold for $25, $50, or $100 per share. Dividends are fixed either as a dollar amount or as a
percentage of par value. Example: In 1988, Xerox issued $75 million of 8.25%
preferred stock at $50 per share $4.125 is the fixed, annual dividend per share
Slide 4
Preferred Stock Features Firms may have multiple classes of preferreds,
each with different features Priority: lower than debt, higher than common
stock Cumulative feature: all past unpaid preferred
stock dividends must be paid before any common stock dividends are declared
Protective provisions are common
Slide 5
Preferred Stock Features (Continued) Convertibility: many preferred stocks are convertible
into common shares Adjustable rate preferred stocks have dividends tied to
interest rates Participation: some (very few) preferred stocks have
dividends tied to the firm’s earnings PIK Preferred: Pay-in-kind preferred stocks pay
additional preferred shares to investors rather than cash dividends
Retirement: Most preferred stocks are callable, and many include a sinking fund provision to set cash aside for the purpose of retiring preferred shares
Slide 6
Preferred Stock Valuation A preferred stock can usually be valued like a
perpetuity:
return required the k
stockpreferred the of value the V
payment dividend constant theD
k
DV
ps
ps
psps
Slide 7
Derivation of Zero Growth Equation
psps
psps
pspspsps
pspsps
2ps
2ps
1ps
1ps
pspsps
1nps
2ps
1ps
psps
psnps
3ps
2ps
1ps
psps
nps
3ps
2ps
1ps
ps
n3210
nps
n3
ps
32
ps
21
ps
1ps
k
DV
DkV
DVkVV
DV)k1(V
...)k1(
D
)k1(
D
)k1(
D
)k1(
DDV)k1(V
periods; of number large a Assuming
1. equation of term first and 2 equation of term secondStarting
2. Equation from 1 Equation Subtract
2) (Equation )k1(
D....
)k1(
D
)k1(
DD)k1(V
)k1()k1(
D....
)k1(
D
)k1(
D
)k1(
D)k1(V
r)(1by sideeachMultiply
1) (Equation )k1(
D....
)k1(
D
)k1(
D
)k1(
DV
D......DDDDD
)k1(
D....
)k1(
D
)k1(
D
)k1(
DV
:Growth Zero
-
-
---
-
Slide 8
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%
42.43$095.0
125.4$
psps k
DV
Slide 9
Expected Rate of Return on Preferred Just adjust the valuation model:
If we know the preferred stock price is $40, and the preferred dividend is $4.125, the expected return is:
price market current the P
return expected the k
P
Dk
0
ps
0ps
1031.000.40$
125.4$
0
P
Dk ps
Slide 10
The Financial Pages: Preferred Stocks
52 weeks Yld Vol
Hi Lo Sym Div % PE 100s Close
2788 2506 GenMotor pfG 2.28 8.9 … 86 2553
Dividend: $2.28 on $25 par value
= 9.12% dividend rate.
Expected return: $2.28 / $25.53 = 8.9%.
Slide 11
Common Stock 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
Slide 12
Common Stock Characteristics Claim on Income – a stockholder has a claim on
the firm’s residual income Claim on Assets – a stockholder has a residual
claim on the firm’s assets in case of liquidation Preemptive Rights – stockholders may share
proportionally in any new stock issues Voting Rights – right to vote for the firm’s board
of directors
Slide 13
Common Stock Valuation(Single Holding Period)
You expect XYZ stock to pay a $5.50 dividend at the end of the year. The stock price is expected to be $120 at that time.
If you require a 15% rate of return, what would you pay for the stock now?
0 1
? $5.50 + $120.00
Slide 14
13.109$)15.1(
00.120$50.5$
)1(
: todayback to hemdiscount tsimply can we
year, oneonly for flowscash have weBecasue
11
cs
cscs
V
k
PDV
Common Stock Valuation(Single Holding Period)
N I/Y P/Y PV PMT FV MODE
1 15 1 -109.13 0 125.50
Slide 15
Common Stock Valuation(Multiple Holding Periods)
Constant Growth Model Assumes common stock dividends will grow at a
constant rate into the future.
return required the k
dividend syear' next the D
dividends of rate growth constant the g
payment dividend recent most the D
stockcommon the of Value V
where
gk
)g1(DV or
gk
DV
cs
1
0
cs
cs
0cs
cs
1cs
Slide 16
Derivation of Constant Growth Equation
Vcs is replaced by P0
gk
D
gk
)g1(DV
)g1(D)gk(V
)g1(DgVVkVV
D)g1(
))g1(V())k1(V(
D)g1(
)g1(V
)g1(
)k1(V
DV)g1(
)k1(V
...)k1(
)g1(D
)k1(
)g1(D
)k1(
)g1(D
)k1(
)g1(DDV
)g1(
)k1(V
periods; of number large a Assuming
1. equation of term first and 2 equation of term secondstarting
2, Equation from 1 Equation Subtract
2) (Equation )k1(
)g1(D....
)k1(
)g1(D
)k1(
)g1(DD
)g1(
)k1(V
)g1(
)k1(
)k1(
)g1(D....
)k1(
)g1(D
)k1(
)g1(D
)k1(
)g1(D
)g1(
)k1(V
)g1(
)k1(by sideeachMultiply
1) (Equation )k1(
)g1(D....
)k1(
)g1(D
)k1(
)g1(D
)k1(
)g1(DV
:Growth Constant
cs
1
cs
0ps
0csps
0pspscspsps
0pscsps
0pscsps
0pscsps
2cs
20
2cs
20
1cs
10
1cs
10
0pscsps
1ncs
1n0
2cs
20
1cs
10
0cs
ps
csn
cs
n0
3cs
30
2cs
20
1cs
10cs
ps
cs
ncs
n0
3cs
30
2cs
20
1cs
10
ps
--
-
--
-
-
-
-
-
-
Slide 17
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%?
00.110$10.015.0
)10.01(00.5$
)1( 0
gk
gDV
cscs
Slide 18
Expected Return on Common Stock Just adjust the valuation model
return expected the k
yield gain capital expected the g
price stockcurrent the P
yield dividend expected the P
D
gP
)g1(Dk or g
P
Dk
cs
0
0
1
o
0cs
o
1cs
Slide 19
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%
1611.005.0$27.00
$3.00 g 1
ocs P
Dk
Slide 20
The Financial Pages:Common Stocks
52 weeks Yld Vol Net
Hi Lo Sym Div % PE 100s Hi Lo Close Chg
135 80 IBM .52 .5 21 142349 99 93 9496 -343
82 18 CiscoSys … 47 1189057 21 19 2025 -113
Slide 21
Sources of Change in Stock Prices
Change in alternative
opportunities
Change in risk
Change in required return
Change in expected dividendsChange
in stock price