FINANCIAL MANAGEMENT
THEORY & PRACTICE CHAPTER 8
• 8-1. Legal Rights and Privileges of Common • 8-6. Expected Rate of Return on a Constant
Shareholders Growth Stock
• 8-2. Types of Common Stock • 8-7. Valuing Nonconstant Growth Stocks
• 8-3. Stock Market Reporting • 8-8. Stock Valuation by the Free Cash Flow
• 8-4. Valuing Common Stocks Approach
• 8-5. Valuing a Constant Growth Stock • 8-9. Market Multiple Analysis
• 8-10. Preferred Stock
Copyright © 2017 by Nelson Education Ltd. 8-3 Copyright © 2017 by Nelson Education Ltd. 8-4
Copyright © 2017 by Nelson Education Ltd. 8-5 Copyright © 2017 by Nelson Education Ltd. 8-6
Copyright © 2017 by Nelson Education Ltd. 8-7 Copyright © 2017 by Nelson Education Ltd. 8-8
Copyright © 2017 by Nelson Education Ltd. 8-9 Copyright © 2017 by Nelson Education Ltd. 8-10
Copyright © 2017 by Nelson Education Ltd. 8-11 Copyright © 2017 by Nelson Education Ltd. 8-12
Copyright © 2017 by Nelson Education Ltd. 8-15 Copyright © 2017 by Nelson Education Ltd. 8-16
Copyright © 2017 by Nelson Education Ltd. 8-17 Copyright © 2017 by Nelson Education Ltd. 8-18
Copyright © 2017 by Nelson Education Ltd. 8-21 Copyright © 2017 by Nelson Education Ltd. 8-22
Copyright © 2017 by Nelson Education Ltd. 8-23 Copyright © 2017 by Nelson Education Ltd. 8-24
Copyright © 2017 by Nelson Education Ltd. 8-25 Copyright © 2017 by Nelson Education Ltd. 8-26
^ D2 $2.2427 ^
P1 = = P1 – P0 $32.10 – $30.29
rs – g 0.07 CG Yield = =
P0 $30.29
= $32.10 = $30.29(1 + 0.06)
= 6.0%
Copyright © 2017 by Nelson Education Ltd. 8-27 Copyright © 2017 by Nelson Education Ltd. 8-28
Copyright © 2017 by Nelson Education Ltd. 8-29 Copyright © 2017 by Nelson Education Ltd. 8-30
Copyright © 2017 by Nelson Education Ltd. 8-33 Copyright © 2017 by Nelson Education Ltd. 8-34
Copyright © 2017 by Nelson Education Ltd. 8-35 Copyright © 2017 by Nelson Education Ltd. 8-36
8-8 Stock Valuation by the Free Cash 8-9 Market Multiple Analysis
Flow Approach
• Analysts often use the P/E multiple (the price
• Firm value is the present value of its future
expected free cash flows (FCF) discounted at the per share divided by the earnings per share).
WACC. • Example:
• Both the constant growth model – Estimate the average P/E ratio of comparable firms.
This is the P/E multiple.
FCF (1 + g )
V= (8-7) – Multiply this average P/E ratio by the expected
WACC - g earnings of the company to estimate its stock price.
• and the nonconstant growth model can be
applied to FCF.
Copyright © 2017 by Nelson Education Ltd. 8-37 Copyright © 2017 by Nelson Education Ltd. 8-38
Copyright © 2017 by Nelson Education Ltd. 8-39 Copyright © 2017 by Nelson Education Ltd. 8-40
Copyright © 2017 by Nelson Education Ltd. 8-41 Copyright © 2017 by Nelson Education Ltd. 8-42
Copyright © 2017 by Nelson Education Ltd. 8-43 Copyright © 2017 by Nelson Education Ltd. 8-44
Copyright © 2017 by Nelson Education Ltd. 8-45 Copyright © 2017 by Nelson Education Ltd. 8-46
Copyright © 2017 by Nelson Education Ltd. 8-47 Copyright © 2017 by Nelson Education Ltd. 8-48
Copyright © 2017 by Nelson Education Ltd. 8-49 Copyright © 2017 by Nelson Education Ltd. 8-50
Copyright © 2017 by Nelson Education Ltd. 8-51 Copyright © 2017 by Nelson Education Ltd. 8-52
Copyright © 2017 by Nelson Education Ltd. 8-55 Copyright © 2017 by Nelson Education Ltd. 8-56
Copyright © 2017 by Nelson Education Ltd. 8-57 Copyright © 2017 by Nelson Education Ltd. 8-58
Copyright © 2017 by Nelson Education Ltd. 8-59 Copyright © 2017 by Nelson Education Ltd. 8-60
rs = 1
+g
calculated as the present value of the stream of P0
dividends that the stock is expected to provide • A zero growth stock is one whose future
in the future. dividends are not expected to grow at all.
• The intrinsic value of a constant growth stock is • A supernormal growth stock is one whose
calculated as earnings and dividends are expected to grow
^
D1 much faster than the economy as a whole over
P0 = r some specified time period and then to grow at
s -g
the “normal” rate.
Copyright © 2017 by Nelson Education Ltd. 8-63 Copyright © 2017 by Nelson Education Ltd. 8-64
Summary (cont’d)
• The Efficient Market Hypothesis (EMH) holds
(1) that stocks are always in equilibrium and (2)
that it is impossible for an investor without
inside information to consistently “beat the
market.”
• According to the EMH, stocks are always fairly
valued and all stocks’ expected returns plot on
the SML.