1 / 16

VALUING COMMON STOCKS

VALUING COMMON STOCKS. Expected return : the percentage yield that an investor forecasts from a specific investment over a set period of time. Sometimes called the holding period return (HPR) Expected return = (Div 1 + P 1 – P 0 )/P 0 = Dividen Yield + Capital Appreciation

callum-brooks
Download Presentation

VALUING COMMON STOCKS

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. VALUING COMMON STOCKS • Expected return : the percentage yield that an investor forecasts from a specific investment over a set period of time. Sometimes called the holding period return (HPR) • Expected return = (Div1 + P1 – P0)/P0 = Dividen Yield + Capital Appreciation = Div1/P0 + (P1 – P0)/P0 • Dividen Discount Model : Computation of today’s stock price which states that share value equals the present value P0 ={[Div1/(1+r)1] + [Div2/(1+r)2] + . . . +[(DivH+PH)/(1+r)H]}

  2. 5.4 The Present Valueof Common Stocks • Dividends versus Capital Gains • Valuation of Different Types of Stocks • Zero Growth • Constant Growth • Differential Growth

  3. L = = = Div Div Div 1 2 3 Div Div Div L = + + + 3 1 2 P 0 + + + 1 2 3 ( 1 r ) ( 1 r ) ( 1 r ) Div = P 0 r Case 1: Zero Growth • Assume that dividends will remain at the same level forever Since future cash flows are constant, the value of a zero growth stock is the present value of a perpetuity:

  4. = + Div Div ( 1 g ) 1 0 = + = + 2 Div Div ( 1 g ) Div ( 1 g ) 2 1 0 = + = + 3 Div Div ( 1 g ) Div ( 1 g ) 3 2 0 . . . Div = 1 P 0 - r g Case 2: Constant Growth Assume that dividends will grow at a constant rate, g, forever. i.e. Since future cash flows grow at a constant rate forever, the value of a constant growth stock is the present value of a growing perpetuity:

  5. = + Div Div (1 g ) 1 0 1 = + = + 2 Div Div (1 g ) Div (1 g ) 2 1 1 0 1 = + = + N Div Div (1 g ) Div (1 g ) - N N 1 1 0 1 = + = + + N Div Div (1 g ) Div (1 g ) (1 g ) + N 1 N 2 0 1 2 Case 3: Differential Growth Assume that dividends will grow at rate g1 for N years and grow at rate g2 thereafter . . . . . .

  6. + + 2 Div (1 g ) Div (1 g ) 0 1 0 1 … 0 1 2 + Div (1 g ) N 2 + N Div (1 g ) = + + N Div (1 g ) (1 g ) 0 1 … … 0 1 2 N N+1 Case 3: Differential Growth Dividends will grow at rate g1 for N years and grow at rate g2 thereafter

  7. é ù + T C ( 1 g ) = - 1 P 1 ê ú A - + T r g ( 1 r ) ë û 1 æ ö Div ç ÷ + N 1 ç ÷ - r g è ø = 2 P B + N ( 1 r ) Case 3: Differential Growth We can value this as the sum of: an N-year annuity growing at rate g1 plus the discounted value of a perpetuity growing at rate g2 that starts in year N+1

  8. æ ö Div ç ÷ + N 1 ç ÷ - é ù + T r g C ( 1 g ) è ø = - + 2 1 P 1 ê ú - + + T N r g ( 1 r ) ( 1 r ) ë û 1 Case 3: Differential Growth To value a Differential Growth Stock, we can use Or we can cash flow it out.

  9. A Differential Growth Example A common stock just paid a dividend of $2. The dividend is expected to grow at 8% for 3 years, then it will grow at 4% in perpetuity. What is the stock worth? The discount rate is 12%.

  10. æ ö Div ç ÷ + N 1 ç ÷ - é ù + T r g C ( 1 g ) è ø = - + 2 1 P 1 ê ú - + + T N r g ( 1 r ) ( 1 r ) ë û 1 æ ö 3 $ 2 ( 1 . 08 ) ( 1 . 04 ) ç ÷ ç ÷ - é ù ´ 3 . 12 . 04 $ 2 ( 1 . 08 ) ( 1 . 08 ) è ø = - + 1 P ê ú - 3 3 . 12 . 08 ( 1 . 12 ) ( 1 . 12 ) ë û ( ) $ 32 . 75 [ ] = ´ - + P $ 54 1 . 8966 3 ( 1 . 12 ) = = + P $ 28 . 89 P $ 5 . 58 $ 23 . 31 With the Formula

  11. 3 3 $ 2(1 . 08) $ 2(1 . 08) ( 1 . 04 ) 2 $ 2(1 . 08) $ 2(1 . 08) $ 2 . 62 + $ 2 . 52 $ 2 . 33 $ 2 . 16 . 08 + $ 2 . 16 $ 2 . 33 $ 2 . 52 $ 32 . 75 = + + = P $ 28 . 89 0 2 3 1 . 12 ( 1 . 12 ) ( 1 . 12 ) A Differential Growth Example (continued) … 0 1 2 3 4 The constant growth phase beginning in year 4 can be valued as a growing perpetuity at time 3. 0 1 2 3

  12. VALUING COMMON STOCKS • Example : Current forecasts are for XYZ Company to pay dividends of $3, $3.24 and $3,50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12% expected return? (PV = $75.00) • If we forecast no growth, and plan to hold out stock indefinitely, we will then value the stock as a PERPETUITY. Perpetuity = Po = Div1/r or EPS/r • Constant Growth DDM : A version of the dividend growth model in which dividends grow at a constant rate (Gordon Growth Model)

  13. VALUING COMMON STOCKS • GGM,P0 = Div1/(r – g) • Example : What is the value of a stock that expects to pay a $3.00 dividend next year, and then increase the dividen at a rate of 8% per year, indefinitely? Assume a 12% expected return.(P0 = $75.00) • If the same stock is selling for $100 in the stock market, what might the market be assuming about the growth in dividends? (g = .09) • If a firm elects to pay a lower dividen, and reinvest the funds, the stock price may increase because future dividends may be higher • Payout Ratio : Fraction of earnings paid out as dividends • Plowback Ratio : Fraction of earnings retained by the firm • g = return on equity x plowback ratio

  14. VALUING COMMON STOCKS • Example : Our company forecasts to pay a $5.00 dividen next year, which represents 100% of its earnings. This will provide investors with a 12% expected return. Instead, we decide to plowback 40% of the earnings at the firm’s current return on equity of 20%. What is the value of the stock before and after the plowback decision? (No growth : P0 = 5/.12 = $41.67 ; With growth : g = .20x.40 = .08, and P0 = 3/(.12 - .08) = $75.00) • If the company did not plowback some earnings, the stock price would remain at $41.67. With the plowback, the price rose to $75.00 • The difference between these two numbers ($75.00 - $41.67) is called the Present Value of Growth Oppurtunities (PVGO). • PVGO : Net Present Value of a firm’s future investment • Sustainable Growth Rate : Steady rate at which a firm can grow: plowback ratio x return on equity

  15. KONSEP PENENTUAN HARGA SAHAM • Expectation: a) Dividen, b) capital gain • Dalam penentuan harga saham  Time value of money concept • Harga saham dipengaruhi: a) r (gunakan CAPM) dipengaruhi β dan Rf , b) Div dipengaruhi laba. MODEL BERDASARKAN ARUS KAS • Model dengan pertumbuhan konstan, asumsi ; a. Perusahaan mempertahankan DPR sbg dividen yg konstan b. Setiap laba yg diinvestasikan kembali memperoleh tingkat keuntungan yg sama setiap tahunnya. c.Sbg akibatnya maka EPS dan DPS akan meningkat dengan % yg konstan setiap tahunnya : Do = Eo(1 – b), D1= E1(1 – b) PER = (1 – b)/(r - g)

  16. continue 2. Model dengan dua periode pertumbuhan : pertumbuhan tidak diasumsikan konstan selamanya, tetapi akan berubah setelah periode tertentu. 3. Model dengan tiga periode pertumbuhan, perluasan model 2 4. Model Regresi Crossectional Faktor yg mempengaruhi PER;  a. Elton Gruber (1991); PER = a + b (pertumbuhan div atau laba) b. Whitbecker-Kisor (1969) ; i) tingkat pertumbuhan laba, ii) DPR, iii) Deviasi standar tingkat pertumbuhan PER = a + β1a + β2b + β3c

More Related