Slide 1Chapter OutlineLearning ObjectivesLearning Objectives (continued)Learning Objectives (continued)Learning Objectives (continued)Learning Objectives (continued)Learning Objectives (continued)9.1 The Dividend Discount Model9.1 The Dividend Discount Model (cont'd)Dividend Yields, Capital Gains, and Total ReturnsTextbook Example 9.1Textbook Example 9.1 (cont'd)Alternative Example 9.1Alternative Example 9.1 (cont’d)A Multi-Year InvestorThe Dividend-Discount Model EquationThe Dividend-Discount Model Equation (cont'd)9.2 Applying the Discount-Dividend Model9.2 Applying the Discount-Dividend Model (cont'd)Textbook Example 9.2Textbook Example 9.2 (cont'd)Alternative Example 9.2Alternative Example 9.2 (cont’d)Dividends Versus Investment and GrowthDividends Versus Investment and Growth (cont'd)Dividends Versus Investment and Growth (cont'd)Dividends Versus Investment and Growth (cont'd)Dividends Versus Investment and Growth (cont'd)Dividends Versus Investment and Growth (cont'd)Textbook Example 9.3Textbook Example 9.3 (cont'd)Textbook Example 9.4Textbook Example 9.4 (cont'd)Alternative Example 9.4Alternative Example 9.4 (cont’d)Alternative Example 9.4 (cont’d)Changing Growth RatesChanging Growth Rates (cont'd)Changing Growth Rates (cont'd)Textbook Example 9.5Textbook Example 9.5 (cont'd)Limitations of the Dividend-Discount Model9.3 Total Payout and Free Cash Flow Valuation Models9.3 Total Payout and Free Cash Flow Valuation Models (cont'd)9.3 Total Payout and Free Cash Flow Valuation Models (cont'd)Textbook Example 9.6Textbook Example 9.6 (cont'd)The Discounted Free Cash Flow ModelThe Discounted Free Cash Flow Model (cont'd)The Discounted Free Cash Flow Model (cont'd)The Discounted Free Cash Flow Model (cont'd)Textbook Example 9.7Textbook Example 9.7 (cont'd)The Discounted Free Cash Flow Model (cont'd)Textbook Example 9.8Textbook Example 9.8 (cont'd)Slide 589.4 Valuation Based on Comparable FirmsValuation MultiplesValuation Multiples (cont'd)Valuation Multiples (cont'd)Textbook Example 9.9Textbook Example 9.9 (cont'd)Alternative Example 9.9Alternative Example 9.9 (cont’d)Valuation Multiples (cont'd)Textbook Example 9.10Textbook Example 9.10 (cont'd)Alternative Example 9.10Alternative Example 9.10 (cont’d)Valuation Multiples (cont'd)Limitations of MultiplesComparison with Discounted Cash Flow MethodsSlide 75Stock Valuation Techniques: The Final WordSlide 779.5 Information, Competition, and Stock PricesFigure 9.3 The Valuation Triad9.5 Information, Competition, and Stock Prices (cont'd)Textbook Example 9.11Textbook Example 9.11 (cont'd)Alternative Example 9.11Alternative Example 9.11 (cont’d)Alternative Example 9.11 (cont’d)Competition and Efficient MarketsCompetition and Efficient Markets (cont'd)Textbook Example 9.12Textbook Example 9.12 (cont'd)Competition and Efficient Markets (cont'd)Competition and Efficient Markets (cont'd)Textbook Example 9.13Textbook Example 9.13 (cont'd)Figure 9.4 Possible Stock Price PathsLessons for Investors and Corporate ManagersLessons for Investors and Corporate Managers (cont'd)The Efficient Markets Hypothesis Versus No ArbitrageDiscussion of Data Case Key TopicChapter QuizChapter QuizChapter 9Valuing StocksCopyright ©2014 Pearson Education, Inc. All rights reserved.Chapter Outline9.1 The Dividend Discount Model9.2 Applying the Dividend Discount Model9.3 Total Payout and Free Cash Flow Valuation Models9.4 Valuation Based on Comparable Firms9.5 Information, Competition, and Stock PricesCopyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives1. Describe, in words, the Law of One Price value for a common stock, including the discount rate that should be used.2. Calculate the total return of a stock, given the dividend payment, the current price, and the previous price.Copyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)3. Use the dividend-discount model to compute the value of a dividend-paying company’s stock, whether the dividends grow at a constant rate starting now or at some time in the future.4. Discuss the determinants of future dividends and growth rate in dividends, and the sensitivity of the stock price to estimates of those two factors.Copyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)5. Given the retention rate and the return on new investment, calculate the growth rate in dividends, earnings, and share price.6. Describe circumstances in which cutting the firm’s dividend will raise the stock price.Copyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)7. Assuming a firm has a long-term constant growth rate after time N + 1, use the constant growth model to calculate the terminal value of the stock at time N.8. Compute the stock value of a firm that pays dividends as well as repurchasing shares.Copyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)9. Use the discounted free cash flow model to calculate the value of stock in a company with leverage.10. Use comparable firm multiples to estimate stock value.11. Explain why several valuation models are required to value a stock.12. Describe the impact of efficient markets hypothesis on positive-NPV trades by individuals with no inside information.Copyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)13. Discuss why investors who identify positive-NPV trades should be skeptical about their findings, unless they have inside information or a competitive advantage. As part of that, describe the return the average investor should expect to get.14. Assess the impact of stock valuation on recommended managerial actions.Copyright ©2014 Pearson Education, Inc. All rights reserved.9.1 The Dividend Discount Model•A One-Year Investor–Potential Cash Flows•Dividend•Sale of Stock–Timeline for One-Year Investor•Since the cash flows are risky, we must discount them at the equity cost of capital.Copyright ©2014 Pearson Education, Inc. All rights reserved.9.1 The Dividend Discount Model (cont'd)•A One-Year Investor–If the current stock price were less than this amount, expect investors to rush in and buy it, driving up the stock’s price. –If the stock price exceeded this amount, selling it would cause the stock price to quickly fall.Copyright ©2014 Pearson Education, Inc. All rights reserved.Dividend Yields, Capital Gains, and Total Returns•Dividend