EBF 2054
2054
Financial
FinancialManagement
Management
Thinking of stocks
Security Valuation
Preferred Stock
A hybrid security:
Its like common stock - no fixed
maturity.
Preferred Stock
Preferred Stock
Valuation
A preferred stock can usually
Vps =
D
k ps
D = Dividend
K= required rate of return
V ps =
Example:
D
k ps
Vps =
4.125
.095
$43.42
kps =
D
Po
Example
kps =
D
Po
10.31%
4.125
=
.1031
40
Vol
100s
86
Close
25 53
Common Stock
Is a variable-income security.
Represents equity or
ownership.
Includes voting rights.
Limited liability: liability is
limited to amount of owners
investment.
Priority: lower than debt and
preferred.
KLCI movement
5.50 + 120
Solution:
Vcs = (5.50/1.15) + (120/1.15)
= 4.783
+ 104.348
= $109.13
Or Vcs = (5.5+120)/1.15 =$ 109.13
47 1189057 21
19 20 25 -113
Model
Vcs =
D1
kcs - g
Example
Vcs =
D1
kcs - g
5.50
.15 - .10
= $110
Vcs =
k =
D1
kcs - g
D1
Vcs
) + g
Expected Return on
Common Stock
Just adjust the valuation model
Vcs =
k =
D
kcs - g
D1
Po
) + g
Example
Example
kcs =
kcs = (
3.00
27
D1
Po
) + g
) + .05
= 16.11%
P0 =
D3
D1
D2
D
+
+
+ ... +
1
2
3
(1+rs )
(1+rs )
(1+rs )
(1+rs )
10-28
rs > g.
g is expected to be constant forever.
10-30
g = 6%
D0 = 2.00
2.12
2.247
1.8761
1.7599
rs = 13%
1.6509
10-31
3
2.382
P0
rs g 0.13 0.06
$2.12
0.07
$30.29
10-32
P1
rs g 0.13 0.06
$32.10
1 P0 (1.06) $32.10
P
as:
= (P1 P0)/P0
= ($32.10 $30.29)/$30.29 = 6.0%
Total return (rs)
10-35
D0 = 2.00
2
g = 30%
2.600
3
g = 30%
3.380
4
g = 6%
4.394
4.658
2.301
2.647
3.045
3
P
46.114
0
54.107 =P
10-36
4.658
$66.54
0.13 0.06
= $2.60/$54.11 = 4.81%
Capital gains
yield and
capital gains yield are not constant, and
capital gains yield g.
After t = 3, the stock has constant growth and
dividend yield = 7%, while capital gains yield =
6%.
10-37
rs = 13%
g = 0%
D0 = 2.00
2
g = 0%
2.00
3
g = 0%
2.00
4
g = 6%
2.00
2.12
1.77
1.57
1.39
20.99
3
P
0
25.72 =P
10-38
2.12
$30.29
0.13 0.06
= $2.00/$25.72 = 7.78%
Capital gains yield (first year)
P0
rs g
rs g
$2.00(0.94) $1.88
$9.89
0.13 (-0.06) 0.19
10-40
= g = 6.00%
Dividend yield
V firm
FCF1
FCF2
FCF
...
1
2
(1 WACC ) (1 WACC )
(1 WACC )
FCF=free cash flow
WACC= Weighted average cost of capital
10-45
Example 1:
ABCBerhad embarked on an aggressive expansion that requires
additional capital. Management decided to finance the expansion by
borrowing $40 million and by halting dividend payments to increase
retained earnings.
Its WACC is now 10%, and the projected free cash flows for the next 3
years are -$5 million, $10 million, and $20 million.
After Year 3, free cash flow is projected to grow at a constant 6%.
What is ABC Berhad s total value? If it has 10 million shares of stock
and $40 million of debt and preferred stock combined, what is the
price per share?
r = 10%
1
-5
2
10
4
g = 6%
20
r = 10%
-5
10
3
20
4
g = 6%
V4 V3 (1 g )
20(1.06)
21.20
Common Stock
Valuation
(Multiple Holding
Periods)
Constant Growth Model
TV3
21.20
TV3
530
0.10 0.06
-5
10
20
21.20
-4.545
8.264
15.026
398.197
416.942
Firms MV
21.20
530
TV3
0.10 0.06
10-48
Example 2:
Suppose Atiqah Corp. is expected to
Solution:
D1
p0
END OF LECTURE