The topics discussed in this chapter are equity markets and stock valuation. After completing this unit, you should be able to: Understand how share prices depend on future dividends and dividend growth, be able to compute share prices using the dividend growth model, understand how share markets work, understand how share prices are quoted. | Equity Markets and Stock Valuation Chapter 7 Key Concepts and Skills Understand how share prices depend on future dividends and dividend growth Be able to compute share prices using the dividend growth model Understand how share markets work Understand how share prices are quoted 7- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Chapter Outline Ordinary Share Valuation Some Features of Ordinary and Preference Shares The Stock Markets 7- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Cash Flows to Shareholders If you buy a share, you can receive cash in two ways: The company pays dividends You sell your shares, either to another investor in the market or back to the company As with bonds, the price of the share is the present value of these expected cash flows 7- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler One Period Example Suppose you are thinking of purchasing shares in Moore Oil Ltd, and you expect it to pay a $2 dividend in one year and you believe that you can sell the share for $14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay? Compute the PV of the expected cash flows Price = (14 + 2) / () = $ Or FV = 16; I/Y = 20; N = 1; CPT PV = 7- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Two Period Example Now what if you decide to hold the share for two years? In addition to the dividend in one year, you expect a dividend of $ and a share price of $ at the end of year 2. Now . | Equity Markets and Stock Valuation Chapter 7 Key Concepts and Skills Understand how share prices depend on future dividends and dividend growth Be able to compute share prices using the dividend growth model Understand how share markets work Understand how share prices are quoted 7- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Chapter Outline Ordinary Share Valuation Some Features of Ordinary and Preference Shares The Stock Markets 7- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Cash Flows to Shareholders If you buy a share, you can receive cash in two ways: The company pays dividends You sell your shares, either to another investor in the market or back to the company As with bonds, the price of the share is the present value of these .
