Chapter 8 Equity Markets and Stock Valuation 0
0 Chapter 8 Equity Markets and Stock Valuation
Chapter Outline Common Stock Valuation Some Features of Common and Preferred Stocks The Stock Markets
1 Chapter Outline n Common Stock Valuation n Some Features of Common and Preferred Stocks n The Stock Markets
Key Concepts and Skills Understand how stock prices depend on future dividends and dividend growth Be able to compute stock prices using the dividend growth model Understand how corporate directors are elected Understand how stock markets work Understand how stock prices are quoted 2
2 Key Concepts and Skills n Understand how stock prices depend on future dividends and dividend growth n Be able to compute stock prices using the dividend growth model n Understand how corporate directors are elected n Understand how stock markets work n Understand how stock prices are quoted
Cash Flows to Stockholders If you buy a share of stock,you can receive cash in two ways o The company pays dividends You sell your shares either to another investor in the market or back to the company As with bonds,the price of the stock is the present value of these expected cash flows
3 Cash Flows to Stockholders n If you buy a share of stock, you can receive cash in two ways q The company pays dividends q You sell your shares either to another investor in the market or back to the company n As with bonds, the price of the stock is the present value of these expected cash flows
One-Period Example Suppose you are thinking of purchasing the stock of Moore Oil,Inc.You expect it to pay a $2 dividend in one year,and you believe that you can sell the stock for $14 at that time.If you require a return of 20%on investments of this risk,what is the maximum you would be willing to pay? Compute the PV of the expected cash flows 口Price=（14+2)/(1.2)=$13.33 OrFV=16;IY=20;N=1;CPT PV=-13.33
4 One-Period Example n Suppose you are thinking of purchasing the stock of Moore Oil, Inc. You expect it to pay a $2 dividend in one year, and you believe that you can sell the stock for $14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay? q Compute the PV of the expected cash flows q Price = (14 + 2) / (1.2) = $13.33 q Or FV = 16; I/Y = 20; N = 1; CPT PV = -13.33