1 / 40

Preferred Stock Valuation

Preferred Stock Valuation. No ownership as with common stock Give higher return than bonds (debt) V PS :Value of Preferred Stock, $100/sh D PS : Preferred Stock Dividend, $10/sh K PS : Return On Investment or Required Return of Preferred Stock investors, eg. 10%

york
Download Presentation

Preferred Stock Valuation

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. Preferred Stock Valuation • No ownership as with common stock • Give higher return than bonds (debt) • VPS :Value of Preferred Stock, $100/sh • DPS : Preferred Stock Dividend, $10/sh • KPS : Return On Investment or • Required Return of Preferred • Stock investors, eg. 10% • (Risk Free Return + Risk)

  2. Stocks • Calculation: • ROI = KPS= DPS = 10 =0.1= 10% • VPS 100 • VPS= DPS = 10 =100 • kPS 0.1

  3. Stocks • If require ROI = 12% = Kps • DPS = 10 • VPS= DPs= 10 = 83.3 • kps 0.12

  4. Common Stock Valuation • Pt = Stock price at time t • Dt = Dividend at time t • D0 = Dividend at time t = 0 (just paid) • D1 = Dividend at time t = 1 (1 year • from today) • KS = Return on Investment on Common • Stock

  5. Common Stock Valuation • D1 = D0 ( 1 + g )1 • D2 = D0 ( 1 + g )2 • where g : expected annual growth (or • increase) in dividend (%)

  6. Common Stock Valuation • Example: • Find Dividend (given g = 5%) • D0 = $10 • D1 = 10.5 = 10 (1 + 0.05)1 = D0 (1+g)t • D2 = 11.03 = 10 (1 + 0.05)2 or • 10.5 (1 + 0.05)1

  7. Common Stock Valuation • Example: • FV = ? • 10% • PV = 100 n=1 • FV = PV ( 1 + i )n PV= FV • ; ( 1 + i)n

  8. Common Stock Valuation INPUTS 1 10% -100 0 N I/YR PV PMT FV 110 OUTPUT

  9. Common Stock Valuation • Example: • D1=10 P1 = 100 • i=?% • PV = 100 1 yr • KS = 10 / 100 = 10%

  10. Common Stock Valuation INPUTS 1 100 -10 -100 N I/YR PV PMT FV 10% OUTPUT

  11. Common Stock Valuation • Example: • D1=10 P1 = 100 • KS = 10% • 1 yr • P0= PV = ?

  12. Common Stock Valuation INPUTS 1 10% -10 100 N I/YR PV PMT FV 100 OUTPUT

  13. Common Stock Valuation • P2 • D1 D2 • 1 yr 2 yr • P0 = ? • P0 = D1+ D2+ P2 • (1+k)1 (1+k)2 (1+k)2

  14. Common Stock Valuation • P0= D1+ D2+ D3++ Dn+ Pn • (1+k)1 (1+k)2 (1+k)3 (1+k)n (1+k)n • If n ¥ • Example: Pn = 100/sh = FV, • n = 99 • k = 15% • PV = ?

  15. Common Stock Valuation INPUTS 99 15% 0 -100 N I/YR PV PMT FV 0.00009793 OUTPUT

  16. Common Stock Valuation • P0= D1+ D2+ D3++ Dn+ Pn • (1+k)1 (1+k)2 (1+k)3 (1+k)n (1+k)n • If n ¥, Pn0 • (1+k)n • Therefore, • P0= D1+ D2+ D3++ Dn • (1+k)1 (1+k)2 (1+k)3 (1+k)n

  17. Common Stock Valuation • P0= D1+ D2+ D3++ Dn • (1+k)1 (1+k)2 (1+k)3 (1+k)n • can be written as: • P0= D0(1+g)1+ D0(1+g)2+ D0(1+g)3 • (1+k)1 (1+k)2 (1+k)3 • ++ D0(1+g)n • (1+k)n

  18. Common Stock Valuation • P0=D0[(1+g)1+ (1+g)2+ (1+g)3+ (1+g)n] • (1+k)1 (1+k)2 (1+k)3 (1+k)n • (1+k)P0=D0[1 +(1+g)1+(1+g)2+(1+g)n-1] • (1+g) 1+k 1+k 1+k • (1+k)P0- P0= D0[1- (1+g)n] • 1+g1+k

  19. Common Stock Valuation • If n ¥, and k > g, • (1+g)n0 • 1+k • then, (1+k)P0 - P0= D0 • 1+g • P0[ 1+k - 1] = D0 • 1+g

  20. Common Stock Valuation • P0[ 1+k-1-g ] = D0 • 1+g • P0[ k-g ] = D0 • 1+g • P0 =D0(1+g) =D1 • k-g k-g

  21. Common Stock Valuation • Example: • g = 5%, D0 = 10 • D1 = 10.5 (10 x 1.05) • ks = 18% • What is the value of the stock? • P0 = D1 =10.5 =80.77= PV • k-g 0.18 - 0.05

  22. Common Stock Valuation • If the stock is purchased at $90, K=? • 90 = 10.5 P0 = D1k-g= D1 • k - 0.05 k-gP0 • k = D1+ g • P0 • k = 17% • Dividend/Stock Price = Dividend Yield

  23. Stock Markets and Stock Reporting • I. Stock Markets • A. New York Stock Exchange (NYSE) • B. American Stock Exchange (AMEX) • C. Over-the-counter (OTC) markets • D. Smaller regional markets • II. Stock Market Reporting • 52 Weeks Yld. P-E Sales Net • High Low Stock Div. % Ratio 100s High Low Close Chg. • 1757/8 102 IBM 4.40 3.8 16 27989 1181/4 1151/4 1171/4 +13/4 • Dividend yield = D/P • = $4.40 / $117.25 = 3.8%

  24. Common Stock Valuation • FV = 110 • i=10% • PV = 100 n=1yr • FV = PV ( 1 + i )n

  25. Common Stock Valuation • PV(1+i)n = FV • 100 (1+0.1) = 110 • 100 (1+0.1)2 = 121 • 100 (1+0.1)3 = 133 • FV • PV = (1+i)n Value of Stock

  26. Common Stock Valuation • Discounted Valuation Approach • Know FV • Calculate PV (price you have to pay now) or (value of stock or bond) • Bond debt - interest • Stock - dividend

  27. Common Stock Valuation • Own stock one year: • d1 P1 • 1 year • k% • Po • d1 P1 • Po = (1+k)1 + (1+k)1 • Appraisal Value of Stock

  28. Common Stock Valuation • 2 years: P2 • D1 D2 • 1 k% 2 • P0 • P0 = D1+ D2+ P2 • (1+k)1 (1+k)2 (1+k)2

  29. Common Stock Valuation • P0= D1+ D2+ D3++ Dn+ Pn • (1+k)1 (1+k)2 (1+k)3 (1+k)n (1+k)n • Make Assumptions: • 1)If n ¥Pn • (1+i)n 0 • 2)If D1 = Do(1+g)1 Assume dividend • D2 = Do(1+g)2 rate increases at • Dn = Do(1+g)n g rate.

  30. Common Stock Valuation • Example: • Do = $10 • g = 5% • D1 =10 (1+0.05) • D1 = $10.5

  31. Common Stock Valuation • Equation : • (1+k)P0=D0[1 +(1+g)1+(1+g)2+(1+g)n-1] • (1+g) 1+k 1+k 1+k • P0= D0(1+g)1+ D0(1+g)2+ D0(1+g)3 • (1+k)1 (1+k)2 (1+k)3 • ++ D0(1+g)n • (1+k)n

  32. Common Stock Valuation • Equation : • P0=D0[(1+g)1+ (1+g)2+ (1+g)3+ (1+g)n] • (1+k)1 (1+k)2 (1+k)3 (1+k)n • Equation : • (1+k)P0- P0= D0[1- (1+g)n] • 1+g1+k

  33. Don’t Forget... • k = ROI (%) = Required Return on Investment • g = Dividend Growth

  34. Common Stock Valuation • If n ¥, and k > g, then • (1+g)n0 • 1+k • and, (1+k)P0 - P0= D0 • 1+g • P0[ 1+k - 1] = D0 • 1+g

  35. Common Stock Valuation • P0[ 1+k-(1+g) ] = D0 • 1+g • P0[ k-g ] = D0 • 1+g • P0 =D0(1+g) =D1 • k-g k-g

  36. Common Stock Valuation • P0 =D1 • k-g • Only when n -- ¥ AND k>g • Gordon Model or • Constant Dividend Growth Model • k-g = D1/ Po k = D1/ Po + g

  37. Just a Reminder... • KR = risk free + risk premium • = Rf + b (Rm - Rf) • market return • *use S&P 500 • risk-free index • *use T-Bill Volatility • Rm - Rf = Market Risk Premium

  38. Common Stock Valuation • Example: • Do=Paid Dividend=$5/share • g=Dividend Growth=5% • KR=Required Return=10% • pay for stock now • Do(1+g) $5(1+0.05) • Po= KR - g =0.1 - 0.05 = $105

  39. Common Stock Valuation • Value of Stock = $105 (appraisal value) • Stock Price = $110 • *Don’t buy the stock because the stock is over valued. (too expensive)

  40. Common Stock Valuation • KE = D1/ Po + g =Expected Return • (Po = Stock Price = $110) • Do (1+g) $5(1+0.05) • KE = + g = +0.05 • Po $110 • KE = 9.7% (Expected Return) • KR = 10% (Required Return) • Therefore, do not purchase

More Related