FIN 300 Chapter Notes - Chapter 8: Cumulative Voting, Primary Market, Secondary Market
28 Jun 2018
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FIN – Chapter 8 – Stock Valuation
With common stock the promised cash flows are not known in advance, the life of the
investment is essentially forever because stock has no maturity, and there is no way to easily
observe the rate of return that the market requires
P0 = (D1+P1)/(1+R) P1=(D2+P2)/(1+R)
P0 – the current price of the stock, and assign P1 to be the price in one period. D1 - the cash
dividend paid at the end of the period. R – the required return in the market on the investment
If you know D2 and P2 and not P1
P1 = D1/(1+R)1 + D2/(1+R)2 + D3/(1+R)3
The price of the stock today is equal to the present value of all the future dividends
Zero growth – common stock in a company with a constant dividend, dividend has zero growth
Value of the stock is
P0 = D /(1+R)1 + D /(1+R)2 + D /(1+R)3…
Per share value
P0 = D/R R – required return
Constant growth – dividend grows at a steady rate. Growth rate – g.
D1 = D0 x (1+g) D2 = D0 x (1+g)2Dt = D0 x (1+g)t
P0 = D1/(R - g)
Dividend growth model – a model that determines the current price of a stock as its dividend
next period divided by the discount rate less the dividend growth rate
Pt = Dt+1 / (R – g)
Present value = C1 (1+g) / (R - g)
Two stage growth – dividend will grow at a rate of g1 for t years and then grow at a rate of g2
forever after
P0 = D1 / (R – g1) X [1-((1+g1)/(1+R))t] + Pt/(1+R)t
Required return
R=D1/P0 + g R = Dividend yield + Capital gains yield
D1/P0 is called the dividend yield – a stocks expected cash dividend divided by its current price
This growth rate can be interpreted as the capital gains yield – the dividend growth rate or the
rate at which the value of an investment grows
Valuating using multiples What to do a company doesn't pay dividends
Price a time t = Pt – Benchmark PE ratio x EPStPrice a time t = Pt – Benchmark PE
ratio x Sales per sharet
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
P0 the current price of the stock, and assign p1 to be the price in one period. D1 - the cash dividend paid at the end of the period. R the required return in the market on the investment. If you know d2 and p2 and not p1. The price of the stock today is equal to the present value of all the future dividends. Zero growth common stock in a company with a constant dividend, dividend has zero growth. P0 = d /(1+r)1 + d /(1+r)2 + d /(1+r)3 . Constant growth dividend grows at a steady rate. D1 = d0 x (1+g) d2 = d0 x (1+g)2. Dividend growth model a model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate. Present value = c1 (1+g) / (r - g)
