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. | 7- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 7- Key Concepts and Skills Understand how stock prices depend on future dividends and dividend growth Be able to compute stock prices using the dividend growth model Understand how corporate directors are elected Understand how stock markets work Understand how stock prices are quoted 7. 7- Chapter Outline Common Stock Valuation Some Features of Common and Preferred Stocks The Stock Markets 7. 7- Cash Flows for Stockholders If you own a share of stock, 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 stock is the present value of these expected cash flows Dividends → cash income Selling → capital gains 7. 7- One Period Example Suppose you are thinking of purchasing the stock of Moore Oil, Inc. You expect it to pay a $2 . | 7- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 7- Key Concepts and Skills Understand how stock prices depend on future dividends and dividend growth Be able to compute stock prices using the dividend growth model Understand how corporate directors are elected Understand how stock markets work Understand how stock prices are quoted 7. 7- Chapter Outline Common Stock Valuation Some Features of Common and Preferred Stocks The Stock Markets 7. 7- Cash Flows for Stockholders If you own a share of stock, 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 stock is the present value of these expected cash flows Dividends → cash income Selling → capital gains 7. 7- One Period Example Suppose you are thinking of purchasing the stock of Moore Oil, Inc. You expect it to pay a $2 dividend in one year You believe you can sell the stock for $14 at that time. You require a return of 20% on investments of this risk What is the maximum you would be willing to pay? 7. 7- One Period Example D1 = $2 dividend expected in one year R = 20% P1 = $14 CF1 = $2 + $14 = $16 Compute the PV of the expected cash flows 7. 7- Two Period Example What if you decide to hold the stock for two years? D1 = $ CF1 = $ D2 = $ P2 = $ Now how much would you be willing to pay? CF2 = $ + $ = $ 7. 7- Three Period Example What if you decide to hold the stock for three years? D1 = $ CF1 = $ D2 = $ CF2 = $ D3 = $ P3 = $ Now how much would you be willing to pay? CF3 = $ + $ = $ 7. 7- Three Period Example Using TI BAII+ Cash Flow Worksheet Display You Enter ‘' C00 0 !# C01 2 !# F01 1 !# C02 !# F02 1 !# C03 !# F03 1 !# ( I 20 !# NPV % Cash Flows: CF0 = 0 CF1 = CF2 = CF3 =
