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    Stock Valuation: Subject: Introduction To Financial Management

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    Adnan Rizvi
    This document provides an introduction to stock valuation. It discusses the different types of stocks, including common stock which provides residual ownership and voting rights, and preferred stock which carries no voting rights but has preference over common stock. It then discusses approaches to valuing stocks based on the present value of expected future cash flows from dividends and capital gains. Specifically, it covers the zero growth, constant growth, and differential growth models for estimating future dividend payments and calculating the stock price under each approach.

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    Stock Valuation: Subject: Introduction To Financial Management

    Uploaded by

    Adnan Rizvi
    24 views24 pages
    This document provides an introduction to stock valuation. It discusses the different types of stocks, including common stock which provides residual ownership and voting rights, and preferred stock which carries no voting rights but has preference over common stock. It then discusses approaches to valuing stocks based on the present value of expected future cash flows from dividends and capital gains. Specifically, it covers the zero growth, constant growth, and differential growth models for estimating future dividend payments and calculating the stock price under each approach.

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    This document provides an introduction to stock valuation. It discusses the different types of stocks, including common stock which provides residual ownership and voting rights, and preferred stock which carries no voting rights but has preference over common stock. It then discusses approaches to valuing stocks based on the present value of expected future cash flows from dividends and capital gains. Specifically, it covers the zero growth, constant growth, and differential growth models for estimating future dividend payments and calculating the stock price under each approach.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    24 views24 pages

    Stock Valuation: Subject: Introduction To Financial Management

    Uploaded by

    Adnan Rizvi
    This document provides an introduction to stock valuation. It discusses the different types of stocks, including common stock which provides residual ownership and voting rights, and preferred stock which carries no voting rights but has preference over common stock. It then discusses approaches to valuing stocks based on the present value of expected future cash flows from dividends and capital gains. Specifically, it covers the zero growth, constant growth, and differential growth models for estimating future dividend payments and calculating the stock price under each approach.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 24

    Stock Valuation

    Subject: Introduction to Financial Management


    Types of stock
    • Common stock:
    • Residual ownership of a firm.
    • Carries the right to vote on.
    ✔ Corporate policy.
    ✔ Composition of the board of directors.
    • Preferred stock:
    • Carries no voting rights.
    • Has preference over common stock.
    • Usually has a fixed dividend.
    Valuation
    • The value of any asset is the present value of its expected future cash
    flows.

    • Stock ownership produces cash flows from:


    • Dividends
    • Capital Gains
    One period Case
    • Suppose you are thinking of purchasing the stock of Cipla.

    • You think that you can sell the stock at ₹600 in an year.

    • You expect a return of 20%.

    • What is the maximum that you would be willing to pay for this stock?
    One period Case
    One period Case
    • You have one more information about the stock i.e., Cipla pays a
    dividend of ₹20 by the end of the year.

    • Now how much would you be willing to pay for the stock?
    One period Case
    Two period case
    • Same stock but you would like to sell at the end of two years at ₹630.

    • Dividend amount is same for two years ₹20

    • Today at what price would like to buy this share


    Two period case
    N-period case
    N-period case
    Stock valuation
    How can we estimate all future dividend payments
    • Zero Growth

    • Constant Growth

    • Differential Growth
    Zero Growth Dividend
    • Assume that dividends will remain at the same level forever

    • Since future cash flows are constant, the value of a zero


    growth stock is the present value of a perpetuity:
    Zero Growth Dividend
    • A stock pays ₹ 50 dividend every quarter. The required rate of
    return is 10%. What is the price of the stock?

    • Ans:
    =50/0.1
    = ₹ 500
    Constant growth dividend
    • Assume that dividends will grow at a constant rate, g, forever,
    i.e.,

    ...
    Constant growth dividend
    • Since future cash flows grow at a constant rate forever:
    Constant growth dividend
    • Suppose Big D, Inc., just paid a dividend of $.50. It is expected to
    increase its dividend by 2% per year. If the market requires a return
    of 15% on assets of this risk level, how much should the stock be
    selling for?
    Constant growth dividend
    • Value of a stock is the present value of all future cash flows

    • We don’t consider the dividend that was already received.


    (the dividend just received)

    • What are cash flows that we are going to receive


    • Dividends that grow at a constant rate
    Constant growth dividend
    Differential Growth
    •Assume that dividends will grow at different rates in the
    foreseeable future and then will grow at a constant rate
    thereafter.
    •To value a Differential Growth Stock
    • Estimate future dividends in the foreseeable future.
    • Estimate the future stock price when the stock becomes a Constant Growth
    Stock
    • Compute the total present value of the estimated future dividends and future
    stock price at the appropriate discount rate.
    Differential Growth
    • Assume that dividends will grow at rate g1 for N years and grow
    at rate g2 thereafter.
    Differential Growth
    A common stock just paid a dividend of $2. The dividend is expected to
    grow at 8% for 3 years then it will grow at 4% in perpetuity. What is
    the stock worth? The discount rate is 12%.
    Differential Growth
    Questions
    • Question 5.16
    • Question 5.20

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