Chapter 8 Stock Valuation Common Stock Valuation Cash Flows Zero Growth D1 D2 Dn D P0 Dn 1 R n Per share value D R Constant Growth Components of the Required Return General Case Constant Growth Non constant Growth Two Stage Growth The Required Return Two Stage Growth Current stock price dividend price in period 1 1 required return P0 D1 P1 1 R P0 Dn 1 R n dividend grows at a steady rate rate g D1 D0 x 1 g D2 D0 x 1 g n Dn D0 x 1 g n P0 D1 R g Present value C 1 g R g Dividend yield stock s expected cash dividend divided by its current price Capital gains yield dividend growth rate or rate at which value of an investment grows Required return dividend yield capital gains yield R D1 P0 g P0 Dn 1 R n Pt Dt x 1 g R g P0 D1 R g Pt D0 x 1 g1 t x 1 g2 R g2 R D1 P0 g price PV of all future dividends price grows if dividend grows at rate g No dividend growth Grows at different rates different periods Pt D0 x 1 g1 t x 1 g2 R g2 P0 D0 R g1 x 1 1 g1 1 R t Pt 1 R t Features of Common Preferred Stocks Common Stock Features common stock equity without priority for dividends or in bankruptcy cumulative voting a shareholder may cast all votes for one member of the board of directors straight voting a shareholder my cast all votes for each member of the board proxy grant of authority by a shareholder allowing another person to vote his shares dividends payments by a corporation to shareholders Preferred Stock Features The Stock Markets preferred stock stock with dividend priority over common stock normally with a fixed dividend rate sometime without voting rights primary market market in which new securities are originally sold to investors secondary market market in which previously issued securities are traded among investors dealer agent who buys and sells securities from inventory broker agent who arranges security transactions among investors
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