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Mr. Al Mannaei
Abstract
Capital Debt
Equity
Abstract
Bonds (Debt) vs. Stock (equity)?!
– Pay higher ?
– Bear higher risk ?
– Considered fixed income ?
– Liquidation!
• who will receive his money first bondholder or
shareholder ?!
– Own part of the corporation ?
Introduction
What is equity ?
•A stock (common/ preferred)
•represent an ownership.
Common Executive
Shareholders Management
Return
Liquidation
Payment
guaranteed/FI
X
Voting
Ownership
Summary
Financial Common Preferred Bond
security Stock Stock
Risk 1 Highest Risk 2 3
Return 1Highest Return 2 3
Liquidation 3 2 1 First to collect their
money.
Payment 3 2 1
guaranteed/FIX
Voting Yes NO NO
D1
P0
(r g )
D1 D0 (1 g )
P0
(r g ) (r g )
Common Stock Valuation
Price a share of common stock with current
dividends of $5, a dividend growth rate of
3% if the investors' required rate of return is
15%.
D1 D0 (1 g )
P0
(r g ) (r g )
Common Stock Valuation
Suppose a dividends on a stock today are $1
per share, and dividends are expected to
remain the same forever. If the required rate
of return is 8%, what is the value of the
stock ?
Exercise
ABC Company pays a 25 cent dividend every
month and the required rate of return is 6% per
year, calculate the value of the stock ?
Wait ! Is it common stock or preferred stock ?!
You purchase 100 shares of Adams Trading
Company stock today for $22.50 per share. At the
end of one year, you collect a dividend of $2.75 and
then sell the stock at $24.50 per share. What is
your total return on the stock? What is the dividend
yield? What is the capital gains yield?
What is the price of a share of common
stock that paid a $4.00 dividend this last
year, expects to grow steadily at 6 per cent
per year, and investors are requiring an 18
per cent rate of return?
Malley Corporation's preferred stock is
currently priced at $85, was issued at $100,
and pays an $8.00 annual dividend. What is
the market required rate of return?
Kaes Power Company promises to maintain
dividends of $5 per share on its common
stock, indefinitely. The stock currently sells
at $37.50 per share. What is the required
return on the stock?
Thank You
Kingsoft Office
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