Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield,...
-
Upload
brice-rich -
Category
Documents
-
view
219 -
download
1
Transcript of Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield,...
![Page 1: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/1.jpg)
Stock Valuation
Chapter 9.1,9.2
![Page 2: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/2.jpg)
Outline
• Investing in stocks– Capital gains, dividend yield, return
• The Constant Dividend Growth Model• The Dividend and Growth Tradeoff• The DGM with Changing Growth rates• Further problems
![Page 3: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/3.jpg)
Investing in Stocks
![Page 4: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/4.jpg)
A One-Year Investor
There are two potential sources of cash flows form owning a stock:• The firm might pay out cash to shareholders in the form
of dividends• The investor can generate cash flows by selling shares at
some future date
The investor pays the current price P0 and at the end of the year expects to receive dividend Div1 and to sell the stock at P1
![Page 5: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/5.jpg)
Equity Cost of Capital
Both potential sources of cash flows form owning a stock are risky• Dividends change overtime• Stock prices fluctuate considerably
Equity investors demand compensation for this higher risk and require a risk-premium as reflected in the:
Equity cost of capital rE
![Page 6: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/6.jpg)
Capital Gains and Dividend Yield
The expected one-period total return on investment in a stock is the sum of the expected capital gain yield and dividend yield
Dividend Yield Capital Gain Rate
Total return on the stock
![Page 7: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/7.jpg)
Stock Prices and Returns
![Page 8: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/8.jpg)
Dividend Yield for stocks in the Dow Jones Industrial Average (2013)
5.33%
3.5% 1.79%
3.03%
2.18%
2.31%
![Page 9: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/9.jpg)
Dividend Yield for stocks in the Dow Jones Industrial Average (2013)
![Page 10: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/10.jpg)
Dividend Yield for stocks in the Nasdaq 100 (2013)
![Page 11: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/11.jpg)
A Two Year Investment
Suppose that the investor wishes to hold the stock for two years
Setting the stock price equal to the present value of future cash flows implies
![Page 12: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/12.jpg)
Dividend Discount Model
Suppose that the investor wishes to hold the stock for n years
Dividend Discount Model
In Efficient Markets
![Page 13: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/13.jpg)
The Constant Dividend Growth Model
![Page 14: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/14.jpg)
Estimating Future Expected Dividend
The simplest approach is to assume that Dividends grow over time with a constant growth rate, g, forever
Constant Dividend Growth Model
![Page 15: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/15.jpg)
Stock Valuation: Constant Dividend Growth
![Page 16: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/16.jpg)
Market Information
Constant Dividend Growth: Application GE
![Page 17: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/17.jpg)
Historical Dividends
![Page 18: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/18.jpg)
Dividends per-share (Dec 2000 – Sept 2013)
![Page 19: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/19.jpg)
Historical Stock Price
Stock price appreciation (from $48.8 to $24.22): -50%
![Page 20: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/20.jpg)
Average annual dividend growth (2000-2013): 6.854%
![Page 21: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/21.jpg)
Implied rate of return on equity for growth 6.854%
![Page 22: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/22.jpg)
The Dividend and Growth Tradeoff (within the Constant Dividend Growth model)
![Page 23: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/23.jpg)
Dividends and Growth
The stock price increases with the level of dividends and the growth rate
What determines the level of growth?
Can management increase the share price by changing its dividend policy?
![Page 24: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/24.jpg)
A Simple Model of Growth
Dividends are paid out of earnings according to the dividend payout rate
Cash flows that are not paid out as dividends are retained
Retention Rate = 1- Dividend payout rate
![Page 25: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/25.jpg)
Dividends and Investment
The firm can pay a higher current dividend by increasing its payout rate
How would a higher payout rate affect future dividends?
Earnings year n Earnings year n+1
Div n New Investment n
Div n+1 New Investment n+1
![Page 26: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/26.jpg)
Calculating Earnings Growth Rate
![Page 27: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/27.jpg)
Cutting Dividends for Profitable Growth
![Page 28: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/28.jpg)
Cutting Dividends for Profitable Growth
![Page 29: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/29.jpg)
Cutting Dividends for Profitable Growth
![Page 30: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/30.jpg)
Second Example
![Page 31: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/31.jpg)
Comparing the two alternatives
![Page 32: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/32.jpg)
Stocks in Nasdaq 100 that have zero dividends
![Page 33: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/33.jpg)
The DGM with changing Growth Rates
![Page 34: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/34.jpg)
Changing Growth Rates
Often firms’ growth rates change overtime:
Young firms tend to retain a high fraction of earnings in order to take advantage of investment opportunities and as a result have high earnings growth rates
As firms mature, their growth slows to rates more typical of established companies. At that point, their earnings exceed their investment needs and they begin to pay dividends
![Page 35: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/35.jpg)
DDM with Constant Long-Term Growth
When growth rates only stabilize at a constant level “g” after period “N+1” ends we value according to:
Where the future price PN is
![Page 36: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/36.jpg)
Varying Growth Rate
![Page 37: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/37.jpg)
Varying Growth Rate
![Page 38: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/38.jpg)
Varying Growth Rate
![Page 39: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/39.jpg)
Further Problems
![Page 40: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/40.jpg)
Acap CorporationQuestion 3 (2nd Edition)Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and $3 per share next year. You expect Acap’s stock price to be $52 in two years. If Acap’s equity cost of capital is 10%:
a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years?
b. Suppose instead you plan to hold the stock for one year. What price would you expect to be able to sell a share of Acap stock for in one year?
c. Given your answer in part (b), what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? How does this compare to your answer in part (a)?
![Page 41: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/41.jpg)
Acap CorporationBuy and hold for two years
Price one year from now
Price one year from now
![Page 42: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/42.jpg)
Colgate-PalmoliveQuestion 12 (2nd Edition):Colgate-Palmolive Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Colgate’s earnings are expected to grow at the current industry average of 5.2% per year.
If Colgate’s equity cost of capital is 8.5% per year and its dividend payout ratio remains constant, what price does the dividend-discount model predict Colgate Stock should sell for?
![Page 43: Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cef5503460f949be171/html5/thumbnails/43.jpg)
Colgate-PalmoliveExpected price time 5
Current Price