3.8 Stock Valuation

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3.8 Stock Valuation

University of Texas at Austin
Fin 320f - Foundations of Finance
Foundations of Finance Documents

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It will fluctuate JP Morgan US banker and financier (1837 – 1913) when asked what the stock market would do  The final exam will take place on Mon, Dec 17th, from 7:00 to 8:00 p.m. in UTC 2.102A (our normal classroom)  If you have another final at the same time, there is a make-up at 9:00 a.m. on the same day  You need my written permission to take the make-up final exam 2011 - 2023© H Toprac 2 Final Exam Foundations of Finance 3.8 Stock Valuation  Pay off debt  Fund new investments  Give it to the stockholders • Either by repurchasing outstanding stock, which  Reduces shares outstanding, and  Reduces equity, or • By paying a dividend to each shareholder 2011 - 2023© H Toprac 4 When companies generate cash from operations, they can:  Companies increase dividend payments only if they can sustain the increase  Companies repurchase their shares when they think the shares are undervalued  Both actions convey positive messages  Stock prices rise after announcements of dividend increases and stock repurchases 2011 - 2023© H Toprac 5 Dividends & repurchases convey information to investors  Reducing dividends sends a negative signal  Stock prices fall after announcements of reductions in dividend payments  In a 2005 survey of CFOs • 94% said they try to avoid reducing dividends • 90% try to maintain a smooth dividend from year to year 2011 - 2023© H Toprac 6 Companies rarely decrease dividend payments

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