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CHAPTER 9 Stocks and Their Valuation

Facts about common stock Intrinsic Value and Stock Price

Determinants of Intrinsic Value and Stock Prices (Figure 1-1)

Different approaches for estimating the intrinsic value of a common stock  Using the multiples of comparable firms Dividend growth model

r )

• Constant growth stock

Future dividends and their present values \$
D
= D
( 1 + g )
t
0
D
0.25
t
PVD =
t
t
( 1
+
r )
P = PVD
0
t
0

What happens if g > r s? If r RF= 7%, r M= 12%, and b = 1.2, what is the required rate of return on the firm’s stock?

find the expected dividend stream for the next 3 years, and their PVs. 0
1
2
3
g = 6%

• 2.247 2.382  r s = 13%  What is the stock’s intrinsic value? What is the expected market price of the stock, one year from now? What are the expected dividend yield, capital gains yield, and total return during the first year?

What would the expected price today be, if g = 0?

3 r s = 13%
...
2.00
2.00
2.00

What if g = 30% for 3 years before achieving long-run growth of 6%?

Valuing common stock with nonconstant growth 0
1
2
3
4
r
= 13%
s
...
g = 30%
g = 30%
g = 30%
g = 6%
D 0 = 2.00
2.600
3.380
4.394
4.658
2.301
2.647
3.045
4.658
46.114
P
=
= \$66.54
3
0.13
0.06
^
54.107
=
P 0

Find expected dividend and capital gains yields during the first and fourth years.

What if g = 0% for 3 years before long-run growth of 6%? 0
1
2
3
4
r
= 13%
s
...
g = 0%
g = 0%
g = 0%
g = 6%
D 0 = 2.00
2.00
2.00
2.00
2.12
1.77
1.57
1.39
2.12
20.99
=
= \$30.29
P  3
0.13
0.06
^
25.72
=
P 0

Find expected dividend and capital gains yields during the first and fourth years.

p negative growth (g = -6%), would anyone buy the stock, and what is its value? Find expected annual dividend and capital gains yields.

gains.

9-22 Corporate value model

Applying the corporate value model Issues regarding the corporate value model

Given the long-run g FCF= 6%, and WACC of 10%, use the corporate value model to find the firm’s intrinsic value. 0
1
2
3
4
r = 10%
...
g = 6%
-5
10
20
21.20
-4.545
8.264
15.026
21.20
398.197
530 =
= TV 3
0.10
-
0.06
416.942

If the firm has \$40 million in debt and has 10 million shares of stock, what is the firm’s intrinsic value per share?

= \$37.69 Firm multiples method

price.

9-28 What is market equilibrium?

)b Market equilibrium

How is market equilibrium established?

How are the equilibrium values determined?

investor. Preferred stock

If preferred stock with an annual dividend of \$5 sells for \$50, what is the preferred stock’s expected return?