Chapter 9 May 041Equity MarketsandStock Valuation2Common Stock vs. Preferred StockPreferred Stock A hybrid security with both debt and equity characteristics. Has priority over common stock in receipt of dividendsand in liquidation. Dividends are fixed as a percentage of par value. Only participating preferred stock (which is rare) shares in the residual income with the common stockholders.Common Stock Owners of the Firm Claim on Assets and Earnings not claimed by other creditors aka Residual Claim Voting Rights Vote for Board of Directors3Stock QuoteSource: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225Company Issuing the Stock4Stock QuoteSource: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225Preferred StockChapter 9 May 045Stock QuoteSource: Wall Street JournalTicker Symbols75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+22552 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chg6Stock QuoteSource: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225Annual Dividend per ShareWhere:.52 = 52¢ per share paid annuallyApple Computer is not currently paying a dividend7Stock QuoteSource: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225Volume of Trading for the day8Stock QuoteSource: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225Daily Trading Range1669= $16.69Chapter 9 May 049Stock Quote$ Closing Price(Market Price--Denoted as P0)Note: DecimalizationSource: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+22510Stock QuoteSource: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225Price Change from Previous Day Trading11Stock QuoteSource: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225Trading Range for Last YearWhere:s denotes recent stock split (prices shown adjusted for split), and12Stock QuoteDividend YieldInvestor’s return from dividend only (assumes constant stock price)Dividend Closing PriceDividend Yield = Source: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225Chapter 9 May 0413Stock QuoteSource: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225Price to Earnings (PE) Ratio(Indicates market premium for given common stock)Closing Price Earnings per SharePE Ratio = No PE for Preferred stock because preferred stock investors not entitled to RESIDUAL Earnings14Valuing Preferred Stock0 1 2 3 ∞P0 = Intrinsic Value of Preferred StockD1=1.88 D2=1.88 D3=1.88= PV of ALL dividends discounted at investor’s Required Rate of ReturnD∞=1.88Source: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+22515Valuing Preferred StockD1=1.88 D2=1.88 D3=1.88=1.88 .10R=10%= $18.800 1 2 3 ∞D∞=1.88P0 =In General:DRBuy?Source: Wall Street Journal52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chgs75191363AppleCptr AAPL 8 143036 166914441638+150134848006IBM IBM .52 .5 23 126999 95 83759463+981262525 IBM pf 1.88 7.4 … 85 258825312538+03139502619ConEd ED 2.18 6.0 12 5609 383136383644-11373135950ConEd pf 5.00 7.1 … 35 702567507025+225P0 = + + +···+1.88 (1+ kp)1.88 (1+ kp)21.88 (1+ kp)31.88 (1+ kp)∞Perpetuity16Valuing Common StockIntrinsic ValueP0= PV of ALL received dividends discounted at investor’s