电子科技大学：《金融学基础》（英文版）Chapter 9 Valuation of Common Stocks

Finance School of management Chapter 9 Valuation of common stocks Objective Explain equity evaluation using discounting Dividend policy and wealth ue sTc

1 Finance School of Management Chapter 9 Valuation of Common Stocks Objective Explain equity evaluation using discounting Dividend policy and wealth

Finance School of management Contents 口 Introduction Q Reading stock listings a The discounted dividend model o Earnings and Investment Opportunities O A Reconsideration of the Price/Earnings Multiple approach O Does dividend policy affect shareholder Wealth? uesTc

2 Finance School of Management Contents ❑ Introduction ❑ Reading Stock Listings ❑ The Discounted Dividend model ❑ Earnings and Investment Opportunities ❑ A Reconsideration of the Price/Earnings Multiple Approach ❑ Does Dividend Policy Affect Shareholder Wealth?

Finance School of management Introduction a Common stock is the best known security, but many people know comparatively little about it o People who own stock have an equity interest in the organization u If a business has shares of stock. it is organized as a corporation rather than a proprietorship or a partnership. uesTc

3 Finance School of Management Introduction ❑ Common stock is the best known security, but many people know comparatively little about it. ❑ People who own stock have an equity interest in the organization. ❑ If a business has shares of stock, it is organized as a corporation rather than a proprietorship or a partnership

Finance School of management Introduction o Shareholder Rights: the right to receive declared dividends on a pro rata basis the right to vote the right to maintain ownership percentage uesTc

4 Finance School of Management Introduction ❑ Shareholder Rights: ➢the right to receive declared dividends on a pro rata basis ➢the right to vote ➢the right to maintain ownership percentage

Finance School of management Reading stock listings 52 Weeks HiLo stock Sym Div /Yld %/PE oll00s Hi Lo Close Net Chg 25382038BM|BM1.54、7.2 123712125208821.25+13 Dividend Yield Price/Earnings Ratio D 市盈率 Close uesTc

5 Finance School of Management Reading Stock Listings 52 Weeks Hi Lo Stock Sym Div Yld % PE Vol100s Hi Lo Close Net Chg 25.38 20.38 IBM IBM 1.54 7.2 12 371 21.25 20.88 21.25 +.13 Dividend Yield Div Close = Price/Earnings Ratio 市盈率

Finance School of management The discounted dividend model a Chapter 8 shows how the Law of one Price can be used to deduce the value of known cash flows from the observed market prices of bonds. a In this chapter we consider the valuation of uncertain cash flows using a discounted cash flow(DCF approach. a The dcF approach to determining the value of a stock discounts the expected cash flows-either dividends paid to shareholders or net cash flows from trading. Assume: buy and hold for ever uesTc

6 Finance School of Management The Discounted Dividend Model ❑ Chapter 8 shows how the Law of One Price can be used to deduce the value of known cash flows from the observed market prices of bonds. ❑ In this chapter we consider the valuation of uncertain cash flows using a discounted cash flow (DCF) approach. ❑ The DCF approach to determining the value of a stock discounts the expected cash flows-either dividends paid to shareholders or net cash flows from trading. Assume: buy and hold for ever

Finance School of management The discounted dividend model a Discount-dividend model(DDM)is defined as any model that computes the value of a share of stock as the present value of its expected future cash dividends a The risk-adjusted discount rate or market capitalization rate is the expected rate of return that investors require to be willing to invest in the stock uesTc

7 Finance School of Management The Discounted Dividend Model ❑ Discount-dividend model (DDM) is defined as any model that computes the value of a share of stock as the present value of its expected future cash dividends. ❑ The risk-adjusted discount rate or market capitalization rate is the expected rate of return that investors require to be willing to invest in the stock

Finance School of management The discounted dividend model o The rate of return that investors expect, E(1), equals the market capitalization rate, k E(r1)= D1+B1 k 、D1+f D 1+k The price is the present value of the expected end-of-year dividend plus the expected ex-dividend price discounted at the required rate return jesT

8 Finance School of Management The Discounted Dividend Model ❑ The rate of return that investors expect, E(r1 ), equals the market capitalization rate, k. 1 1 0 1 0 ( ) D P P E r k P + − = = k D P P + + = 1 1 1 0 The price is the present value of the expected end-of-year dividend plus the expected ex-dividend price discounted at the required rate return

Finance School of management The discounted dividend model a Using the same logic employed to derive Pos the expected price of stock at the beginning of the second year is D+p 1+k u By substitution we can express p in terms of 152s and p D. +p 1+k(1+k)2 uesTc

9 Finance School of Management The Discounted Dividend Model ❑ Using the same logic employed to derive P0 , the expected price of stock at the beginning of the second year is: 2 2 1 1 D P P k + = + ❑ By substitution, we can express P0 in terms of D1 , D2 , and P2 : 1 2 2 0 2 1 (1 ) D D P P k k + = + + +

Finance School of management The discounted dividend model a By repeating this chain of substitutions, we get the general formula of the DDM D D D P (1+k)(1+k +…=∑ (1+k) The price of a share of stock is the present value of all expected future dividends per share. discounted at the market capitalIzation rate uesTc 10

10 Finance School of Management The Discounted Dividend Model ❑ By repeating this chain of substitutions, we get the general formula of the DDM: 1 2 0 2 1 (1 ) (1 ) (1 ) t t t D D D p k k k  = = + + = + + +  The price of a share of stock is the present value of all expected future dividends per share, discounted at the market capitalization rate