Handouts

Stock Valuation

Formulas related to dividends on preferred and common stock:

Dividend per share (preferred) = par value x dividend rate
Total preferred dividend = number of shares x dividend per share
Total common dividend = total dividend – total preferred dividend
total common dividend
Dividend per share (common) =
numbers of shares (common)
dividend per share
Stock Yield Ratio =
market value

Example 1: The board of directors of discovery developers, Inc. has declared a dividend of P53,000,000.
The company has 60,000 shares of preferred stock that pay P50 per share and P100,000 shares of
common stock. Calculate the amount of dividends due the preferred shareholders and dividend per
share of common stock.
Solution: Step 1. Because the preferred dividend is stated in pesos( P50.00 per share).
Step 2. Total preferred dividend = P60,000 x 50 = P3,000,000
Step 3. Total common dividend = P53,000,000 - P3,000,000 = P50,000,000
50,000,000
Step 4. Dividend per share (common) = = P500 per share
100,000

Example 2: A certain corporation declared a 3% dividend on a stock with a par value of P500. Mrs.
Lingan owns 200 shares of stock with a par value of P500. How much is the dividend she received?
Solution: Dividend = dividend percentage x Par value x number of shares
= 3% x 500 x 200
= P 3,000
Thus, the dividend is P3,000.

Example 3: Corporation A, with a current market value of P52, gave a dividend of P8 per share for its
common stock. Corporation B, with a current market value of P95, gave a dividend of P12 per share. Use
the stock yield ratio to measure how much dividends shareholders are getting in relation to the amount
invested.
Solution: Corporation A Corporation B
Given: Dividend per share = P8 Given: Dividend per share = P12
Market Value = P 52 Market Value = P 95
Find: Stock Yield Ratio Find: Stock Yield Ratio
dividend per share
Stock Yield Ratio = Stock Yield Ratio =
market value
dividend per share
market value
= 8 / 52 = 12 / 95
= 0.1538 or 15.38% = 0.1263 or 12.63%

Corporation A has a higher stock yield ratio than Corporation B. Thus, each peso would earn you
more if you invest in Corporation A than in Corporation B.
 Handouts

Bond Valuation

Notations:
F / FV – Par or face value m – conversion period per year Bd – Bond discount
RV – redemption value n – total number of interest BV – Book value
periods. (t x m)
Br – bond rate b – bond rate per interest period Bp – bond premium
(Br / m)
Y – yield rate i = yield rate per interest period Cp – coupon payment
(Y / m)
Rr – redemption rate Pp – purchase prize

Example 1: A P80,000 bond with interest at 5%, m=2 is redeemable at 112% in 12 years. Find the
coupon payment, redemption value, purchase prize and premium that yields the purchaser 3 ½ % , that
compounded semi-annually.

Given: FV = P80,000 Br=5% t = 12 years Rr=112% Y=3 ½ % m=2

Solution: Rr = 112% = 1.12 b = Br/m = 5%/2 = 0.025
N = t x m = 12 x 2 i = Y/m = 3 ½ % / 2 = 0.0175
a. Cp = FV x b = P80,000 x 0.025 = P2,000
b. RV = FV x Rr = P80,000 x 1.12 = P89,600
1−(1+i)−n 1−(1+0.0175)−24
−n
c. Pp = RV(1+i) + Cp
i[ ] -24
= P89,600(1+0.0175) + P2,000
[ 0.0175 ]
= P P89,600(0.659438) + P2,000(19.460686)
= P59, 085.64 + P38, 921.37
= P98,007.01
d. Bp = Pp – RV = P98,007.01 – P89,600 = P8,407.01

Example 2: Determine the amount of the semi-annual coupon for a bond with a face value of P300,000
that pays 10%, payable semi-annually for its coupons.

Given: Face value = P 300,000 ; Coupon rate(r) = 10%

Find: Amount of the Semi-annual Coupon
Annual coupon amount: P300,000 (0.10) = P30,000
Semi-annual coupon amount: P30,000 / 2 = P15,000
Thus, the amount of the semi-annual coupon is P15,000.

Comparison of stocks and Bonds

Stocks Bonds
A form of equity financing or raising money by A form of debt financing, or raising money by
allowing investors to be part owners of the company. borrowing from investors.
Stock prizes vary every day. These prices are reported Investors are guaranteed interest payments and a
in various media( newspaper, TV, internet, etc.) return of their money at the maturity date
Investors can earn if the stock prices increase, but Investors still need to consider the borrower’s credit
they can lose money if the stock prices decrease or rating. Bonds issued by the government pose less risk
worse, if the company goes bankrupt. than those by companies because the government
has guaranteed funding (taxes) from which it can pay
its loans.
Higher risk but with possibility of higher returns Lower risk but lower yield.
Can be appropriate if the investment is for the long Can be appropriate for retirees (because of the
term ( 10 years or more). This can allow guaranteed fixed income) or for those who need the
investors to wait for stock prices to increase if ever money soon ( because they cannot afford
they go low. to take a chance at the stock market).
Definition of terms in relation to stocks

Common stock
- Is the type most people purchase. It represents ownership of a company and a claim on part of the profits.
Investors get one vote per stock.
- Most common type of stock issued to the public which gives the holder the right to vote on corporate
matters during stockholders meeting.
Preferred stock
- don’t have the same voting rights, but investors are usually guaranteed a fixed dividend. If the company is
liquidated, they are paid off first.
- A preferred share does not give the holder the voting right,but ensures a guaranteed stream of profit.
Dividend
- is a money that a company pays to its stockholders from the profits it makes.
- When the company makes money, it distributes part of the profit to its shareholders.
- Share in the company’s profit.
Dividend per share
- Ratio of the dividends to the number of shares
Stock Market
- A place where stocks can be bought or sold. The stock market in the Philippines is governed by the
Philippine Stock Exchange(PSE).
Market value
- When the stock is resold in the stock market, its prize is determined by what the buyer is willing to buy
and the seller willing to accept.
- The current price of a stock at which it can be sold.
Stock Yield Ratio
- A place where stocks can be bought or sold. The stock market in the Philippines is governed by the
Philippine Stock Exchange(PSE).
Par value
- The original prize of the stock at the time of its issuance.
- The per share amount as stated on the company certificate. Unlike market value, it is determined by the
company and remains stable over time.
Definition of terms in relation to bonds
Bonds
- Interest bearing security which promises to pay (1) a stated amount of money on the maturity date and
(2) regular interest payments called coupons.
Redemption value
- The amount that will be paid on the redemption date.
- The value of the bond at the end of its term like promissory note.
Redemption rate or maturity rate
- The rate on the principal; its used to find the redemption value.
- Is the date which the last payment will be paid.
Face value or par value
- The value quoted on the bond.
- The principal amount to be re-paid.
- The amount payable on the maturity date.
Bond rate
- The rate at which the bond pays interest on its par or face value.
- The interest rate on the par value for the periodic coupon payments.
Yield rate
- The true overall rate of return that an investor receives on the invested capital.
Coupon / Coupon payment
- The contract to pay a periodic payment on a specified date. The coupons can be detached and cashed
through the bank.
- Periodic interest payment that the bondholder receives during the time between purchase date and
maturity date; usually received semi – annually.
Coupon rate
- The rate per coupon payment period; denoted by r.
Price of a Bond
- The price of the bond at purchase time; denoted by P.
Bond premium
- If the bond is bought at a prize higher than the face value is said to be bought at a premium.
Bond discount
- If the bond is bought at a prize below than the face value is said to be bought at a discount.
Term of a Bond
- Fixed period of time ( in years) at which the bond is redeemable as stated in the bond certificate; number
of years from time of purchase to maturity date.
Fair price of a Bond
- Present value of all cash inflows to the bondholder.