Valuation of Cash Flow Streams: Company Valuation

Transcript:Valuation of Cash Flow Streams: Company Valuation:
Valuation of Cash Flow Streams: Company Valuation Global Financial Management Campbell R. Harvey Fuqua School of Business Duke University charvey@mail.duke.edu http://www.duke.edu/~charvey Overview Stocks and stock markets Valuation: Use present value formula Dividend growth models Applications Extensions Financial ratios Dividend yields P/E multiples Discounted cash flow models (DCF) Common Stock Stockholders are owners of the firm. Stockholders are residual claimants. Stockholders have the right to: vote at company meetings dividends and other distributions sell their shares Stockholders benefit in two ways: dividends capital gains Stock is issued by public corporations to finance investments. Stock is initially issued in the primary market (IPOs and secondary offerings). Stock is traded in the secondary market on organized exchanges. World Stock Markets New York Tokyo London Frankfurt Paris Johannesburg Sydney Stockholm Amsterdam Switzerland Mexico Canada Brussels Hong Kong Singapore International Stock Market Indices Value on January 17, 1997, Change relative to previous day U. S. Stock Markets Major U. S. Stock Exchanges New York Stock Exchange (NYSE) American Stock Exchange (AMEX) Over-The-Counter (OTC) National Association of Securities Dealers (NASDAQ) U. S. Stock Market Other Indices NYSE Composite Russell 2000 Wilshire 5000 Value Line Transactions Involving Stocks Buy Savings motive Expect stock to appreciate in value Long position Sell Liquidity needs Expect stock to decline in value Short Sell Sell stock without first owning it. Borrow stock from your broker with the promise to repay it at some later date. Sell the borrowed stock. Repurchase it at a later date to repay your broker. Responsible for all dividends and other distributions while short the stock. Stock Valuation The price an investor is willing to pay for a share of stock depends upon: Magnitude and timing of expected future dividends. Risk of the stock. The stock’s discount rate, re, is the rate of return investors can expect to earn on securities with similar risk. Shareholders require a rate of return re for buying a share. They buy for P0 and sell after one year for P1 and receive dividends D1: The next buyer also sells after one year: The same holds for P2. Continuing gives: Share price = PV of dividends Why short-termists are long-termists Assumption: Dividends grow at a constant rate g for ever: Then: Issues: constant growth g < re. Is this a real or a nominal calculation? The “Constant Growth” Formula Simplifying the Dividend Discount Model Constant Dividends Then the pricing relation simplifies to: