Kế toán, kiểm toán - Chapter 5: Basic stock valuation

CHAPTER 5Basic Stock Valuation1Topics in ChapterFeatures of common stockDetermining common stock valuesEfficient marketsPreferred stock2Common Stock: Owners, Directors, and ManagersRepresents ownership.Ownership implies control.Stockholders elect directors.Directors hire management.Since managers are “agents” of shareholders, their goal should be: Maximize stock price.3Classified StockClassified stock has special provisions.Could classify existing stock as founders’ shares, with voting rights but dividend restrictions.New shares might be called “Class A” shares, with voting restrictions but full dividend rights.4Tracking StockThe dividends of tracking stock are tied to a particular division, rather than the company as a whole.Investors can separately value the divisions.Its easier to compensate division managers with the tracking stock.But tracking stock usually has no voting rights, and the financial disclosure for the division is not as regulated as for the company.5Initial Public Offering (IPO)A firm “goes public” through an IPO when the stock is first offered to the public.Prior to an IPO, shares are typically owned by the firm’s managers, key employees, and, in many situations, venture capital providers.6Seasoned Equity Offering (SEO)A seasoned equity offering occurs when a company with public stock issues additional shares.After an IPO or SEO, the stock trades in the secondary market, such as the NYSE or Nasdaq.7Different Approaches for Valuing Common StockDividend growth modelUsing the multiples of comparable firmsFree cash flow method (covered in Chapter 11)8Stock Value = PV of DividendsWhat is a constant growth stock?One whose dividends are expected togrow forever at a constant rate, g.P0 =^(1+rs)1 (1+rs)2 (1+rs)3 (1+rs)∞ D1 D2 D3 D∞++++ 9For a constant growth stock:D1 = D0(1+g)1D2 = D0(1+g)2Dt = D0(1+g)tIf g is constant and less than rs, then:P0 = ^D0(1+g)rs - g=D1rs - g10Dividend Growth and PV of Dividends: P0 = ∑(PVof Dt)$0.25Years (t)Dt = D0(1 + g)tPV of Dt =Dt(1 + r)tIf g > r, P0 = ∞ !11What happens if g > rs?P0 =^ (1+rs)1 (1+rs)2 (1+rs)∞D0(1+g)1 D0(1+g)2 D0(1+rs)∞ +++ (1+g)t (1+rs)tIf g > rs, thenP0 = ∞^> 1, andSo g must be less than rs to use the constant growth model.12Required rate of return: beta = 1.2, rRF = 7%, and RPM = 5%. rs = rRF + (RPM)bFirm = 7% + (5%) (1.2) = 13%.Use the SML to calculate rs:13Projected DividendsD0 = 2 and constant g = 6%D1 = D0(1+g) = 2(1.06) = 2.12D2 = D1(1+g) = 2.12(1.06) = 2.2472D3 = D2(1+g) = 2.2472(1.06) = 2.382014Expected Dividends and PVs (rs = 13%, D0 = $2, g = 6%)012.247222.38203g=6%41.87611.75991.650813%2.1215Intrinsic Stock Value: D0 = 2.00, rs = 13%, g = 6%.Constant growth model:= = = $30.29.0.13 - 0.06$2.12$2.120.07P0 = ^D0(1+g)rs - g=D1rs - g16Expected value one year from now:P1 = ^D2rs - g=$2.24270.07= $32.10D1 will have been paid, so expected dividends are D2, D3, D4 and so on.17Expected Dividend Yield and Capital Gains Yield (Year 1)Dividend yield = = = 7.0%.$2.12$30.29D1P0CG Yield = =P1 - P0^P0$32.10 - $30.29$30.29= 6.0%.18Total Year-1 ReturnTotal return = Dividend yield + Capital gains yield.Total return = 7% + 6% = 13%.Total return = 13% = rs.For constant growth stock: Capital gains yield = 6% = g.19Rearrange model to rate of return form:Then, rs = $2.12/$30.29 + 0.06 = 0.07 + 0.06 = 13%.^P0 = ^D1rs - gtoD1P0rs^=+ g.20If g = 0, the dividend stream is a perpetuity.2.002.002.000123rs=13%P0 = = = $15.38.PMTr$2.000.13^21Supernormal Growth StockSupernormal growth of 30% for 3 years, and then long-run constant g = 6%.Can no longer use constant growth model.However, growth becomes constant after 3 years.22Nonconstant growth followed by constant growth (D0 = $2):02.30092.64703.045346.11351234rs=13%54.1067 = P0g = 30%g = 30%g = 30%g = 6% 2.60 3.38 4.394 4.6576^P3 = ^$4.65760.13 – 0.06= $66.537123Expected Dividend Yield and Capital Gains Yield (t = 0)CG Yield = 13.0% - 4.8% = 8.2%.Dividend yield = = = 4.8%.$2.60$54.11D1P0At t = 0:(More)24Expected Dividend Yield and Capital Gains Yield (t = 4)During nonconstant growth, dividend yield and capital gains yield are not constant.If current growth is greater than g, current capital gains yield is greater than g.After t = 3, g = constant = 6%, so the t = 4 capital gains gains yield = 6%. Because rs = 13%, the t = 4 dividend yield = 13% - 6% = 7%.25Is the stock price based onshort-term growth?The current stock price is $54.11.The PV of dividends beyond year 3 is $46.11 (P3 discounted back to t = 0).The percentage of stock price due to “long-term” dividends is:= 85.2%.$46.11$54.1126Intrinsic Stock Value vs. Quarterly EarningsIf most of a stock’s value is due to long-term cash flows, why do so many managers focus on quarterly earnings?See next slide.27Intrinsic Stock Value vs. Quarterly EarningsSometimes changes in quarterly earnings are a signal of future changes in cash flows. This would affect the current stock price.Sometimes managers have bonuses tied to quarterly earnings.28Suppose g = 0 for t = 1 to 3, and then g is a constant 6%.01.76991.56631.386120.98951234rs=13%25.7118g = 0%g = 0%g = 0%g = 6%2.00 2.00 2.00 2.122.12P30.0730.285729Dividend Yield and Capital Gains Yield (t = 0)Dividend Yield = D1 / P0Dividend Yield = $2.00 / $25.72Dividend Yield = 7.8%CGY = 13.0% - 7.8% = 5.2%.30Dividend Yield and Capital Gains Yield (t = 3)Now have constant growth, so:Capital gains yield = g = 6%Dividend yield = rs – g Dividend yield = 13% - 6% = 7%31If g = -6%, would anyone buy the stock? If so, at what price?Firm still has earnings and still paysdividends, so P0 > 0:^= = = $9.89.$2.00(0.94)0.13 - (-0.06)$1.880.19P0 = ^D0(1+g)rs - g=D1rs - g32Annual Dividend and Capital Gains YieldsCapital gains yield = g = -6.0%.Dividend yield = 13.0% - (-6.0%) = 19.0%.Both yields are constant over time, with the high dividend yield (19%) offsetting the negative capital gains yield.33Using Stock Price Multiples to Estimate Stock PriceAnalysts often use the P/E multiple (the price per share divided by the earnings per share). Example:Estimate the average P/E ratio of comparable firms. This is the P/E multiple.Multiply this average P/E ratio by the expected earnings of the company to estimate its stock price.34Using Entity MultiplesThe entity value (V) is:the market value of equity (# shares of stock multiplied by the price per share)plus the value of debt.Pick a measure, such as EBITDA, Sales, Customers, Eyeballs, etc.Calculate the average entity ratio for a sample of comparable firms. For example,V/EBITDAV/Customers35Using Entity Multiples (Continued)Find the entity value of the firm in question. For example,Multiply the firm’s sales by the V/Sales multiple.Multiply the firm’s # of customers by the V/Customers ratioThe result is the total value of the firm.Subtract the firm’s debt to get the total value of equity.Divide by the number of shares to get the price per share.36Problems with Market Multiple MethodsIt is often hard to find comparable firms.The average ratio for the sample of comparable firms often has a wide range.For example, the average P/E ratio might be 20, but the range could be from 10 to 50. How do you know whether your firm should be compared to the low, average, or high performers?37Preferred StockHybrid security.Similar to bonds in that preferred stockholders receive a fixed dividend which must be paid before dividends can be paid on common stock.However, unlike bonds, preferred stock dividends can be omitted without fear of pushing the firm into bankruptcy.38Expected return, given Vps = $50 and annual dividend = $5Vps= $50 =$5rps^rps$5$50^== 0.10 = 10.0%39Why are stock prices volatile?P0 = ^D1rs - grs = rRF + (RPM)bi could change. Inflation expectations Risk aversion Company risk g could change.40Consider the following situation.D1 = $2, rs = 10%, and g = 5%:P0 = D1 / (rs-g) = $2 / (0.10 - 0.05) = $40.What happens if rs or g change?41Stock Prices vs. Changes in rs and ggrs4%5%6%9%40.00 50.0066.67 10%33.33 40.0050.00 11%28.57 33.3340.0042Are volatile stock prices consistent with rational pricing?Small changes in expected g and rs cause large changes in stock prices.As new information arrives, investors continually update their estimates of g and rs.If stock prices aren’t volatile, then this means there isn’t a good flow of information.43What is market equilibrium?In equilibrium, the expected price must equal the actual price. In other words, the fundamental (or intrinsic) value must be the same as the actual price.If the actual price is lower than the fundamental value, then the stock is a “bargain.” Buy orders will exceed sell orders, the actual price will be bid up. The opposite occurs if the actual price is higher than the fundamental value.(More)44rs = D1/P0 + g = rs = rRF + (rM - rRF)b.^In equilibrium, expected returns must equal required returns:45How is equilibrium established?If rs = + g > rs, then P0 is “too low.”If the price is lower than the fundamental value, then the stock is a “bargain.” Buy orders will exceed sell orders, the price will be bid up until: D1/P0 + g = rs = rs.^D1^^P046What’s the Efficient MarketHypothesis (EMH)?Securities are normally in equilibrium and are “fairly priced.” One cannot “beat the market” except through good luck or inside information.(More)47Weak-form EMHCan’t profit by looking at past trends. A recent decline is no reason to think stocks will go up (or down) in the future. Evidence supports weak-form EMH, but “technical analysis” is still used.48Semistrong-form EMHAll publicly available information is reflected in stock prices, so it doesn’t pay to pore over annual reports looking for undervalued stocks. Largely true.49Strong-form EMHAll information, even inside information, is embedded in stock prices. Not true—insiders can gain by trading on the basis of insider information, but that’s illegal.50Markets are generally efficient because:100,000 or so trained analysts--MBAs, CFAs, and PhDs--work for firms like Fidelity, Merrill, Morgan, and Prudential.These analysts have similar access to data and megabucks to invest.Thus, news is reflected in P0 almost instantaneously.51