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May 30, 2019

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6 vizualizări47 paginifinancial management

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The Valuation of

Long-Term

Securities

4-1

The Valuation of

Long-Term Securities

Distinctions Among Valuation

Concepts

Bond Valuation

Preferred Stock Valuation

Common Stock Valuation

Rates of Return (or Yields)

4-2

What is Value?

Liquidation value represents the

amount of money that could be

realized if an asset or group of

assets is sold separately from its

operating organization.

Going-concern value represents the

amount a firm could be sold for as a

continuing operating business.

4-3

What is Value?

Book value represents either

(1) an asset: the accounting value

of an asset -- the asset’s cost

minus its accumulated

depreciation;

(2) a firm: total assets minus

liabilities and preferred stock as

listed on the balance sheet.

4-4

What is Value?

Market value represents the

market price at which an asset

trades.

Intrinsic value represents the price a security

“ought to have” based on all factors bearing on valuation.

The intrinsic value of a security, on the other hand, is what

the price of a security should be if properly priced based

on all factors bearing on valuation – assets, earnings,

future prospects, management and so on.

4-5

Bond Valuation

Important Terms

Types of Bonds

Valuation of Bonds

Handling Semiannual

Compounding

4-6

Important Bond Terms

instrument issued by a

corporation or government.

The maturity value (MV) [or face

value] of a bond is the stated

value. In the case of a U.S. bond,

the face value is usually $1,000.

4-7

Important Bond Terms

The bond’s coupon rate is the stated rate of interest, or

nominal annual rate of interest, it is stated on the bond’s

face. If, for example, the coupon rate is 12 percent on a

$1,000-face-value bond, the company pays the holder

$120 each year until the bond matures.

is dependent on the risk of the bond

and is composed of the risk-free rate

plus a premium for risk.

4-8

Different Types of Bonds

A perpetual bond is a bond that never

matures. It has an infinite life.

I I I

V= (1 + kd)1 + (1 + kd)2 + ... + (1 + kd)

I

=S (1 + kd)t or I (PVIFA k

d, )

t=1

V = I / kd [Reduced Form]

4-9

Perpetual Bond Example

Bond P has a $1,000 face value and

provides an 8% coupon. The appropriate

discount rate is 10%. What is the value of

the perpetual bond?

kd = 10%.

V = I / kd [Reduced Form]

= $80 / 10% = $800.

4-10

Different Types of Bonds

coupon-paying bond with a finite life.

I I I + MV

V= (1 + kd)1 + (1 + kd)2 + ... + (1 + kd)n

n I MV

=S (1 + kd)t

+ (1 + kd)n

t=1

V = I (PVIFA k

d, n) + MV (PVIF kd, n)

4-11

Coupon Bond Example

Bond C has a $1,000 face value and provides

an 8% annual coupon for 30 years. The

appropriate discount rate is 10%. What is the

value of the coupon bond?

V = $80 (PVIFA10%, 30) + $1,000 (PVIF10%, 30)

= $80 (9.427) + $1,000 (.057)

[Table IV] [Table II]

= $754.16 + $57.00

= $811.16.

4-12

Different Types of Bonds

pays no interest but sells at a deep

discount from its face value; it provides

compensation to investors in the form

of price appreciation.

MV

V= = MV (PVIFk , n)

(1 + kd)n d

4-13

Zero-Coupon

Bond Example

Bond Z has a $1,000 face value and

a 30-year life. The appropriate

discount rate is 10%. What is the

value of the zero-coupon bond?

V = $1,000 (PVIF10%, 30)

= $1,000 (.057)

= $57.00

4-14

Semiannual Compounding

Most bonds in the U.S. pay interest

twice a year (1/2 of the annual

coupon).

Adjustments needed:

(1) Divide kd by 2

(2) Multiply n by 2

(3) Divide I by 2

4-15

Semiannual Compounding

semiannual compounding.

I/2 I/2 I / 2 + MV

V =(1 + k )1

+(1 + k )2

+ ... +(1 + k 2* n

d/2 d/2 d/2 )

2*n I/2 MV

=S (1 + kd /2 )t

+ (1 + kd /2 ) 2*n

t=1

= I/2 (PVIFAk

d /2 ,2*n

) + MV (PVIFkd /2 , 2*n)

4-16

Semiannual Coupon

Bond Example

Bond C has a $1,000 face value and provides

an 8% semiannual coupon for 15 years. The

appropriate discount rate is 10% (annual rate).

What is the value of the coupon bond?

V = $40 (PVIFA5%, 30) + $1,000 (PVIF5%, 30)

= $40 (15.373) + $1,000 (.231)

[Table IV [Table II]

= $614.92 + $231.00

= $845.92

4-17

Semiannual Coupon

Bond Example

Assume that Bond C was purchased on

12-31-2000 and will be redeemed on 12-

31-2015. This is identical to the 15-year

period we discussed for Bond C.

What is its percent of par? What is the

value of the bond?

4-18

Semiannual Coupon

Bond Example

1. What is its 84.592% of par

percent of par? (as quoted in

financial papers)

value of the $1,000 face

bond? value = $845.92

4-19

Preferred Stock Valuation

Preferred Stock is a type of stock

that promises a (usually) fixed

dividend, but at the discretion of

the board of directors.

Preferred Stock has preference over

common stock in the payment of

dividends and claims on assets.

4-20

Preferred Stock Valuation

DP DP DP

V= + + ... +

(1 + kP)1 (1 + kP)2 (1 + kP)

DivP

=S (1 + kP)t

or DivP(PVIFA k

P, )

t=1

V = DP / kP

4-21

Preferred Stock Example

Stock PS has an 8%, $100 par value

issue outstanding. The appropriate

discount rate is 10%. What is the value

of the preferred stock?

DP is annual dividend per share, kP is discount rate.

DP = $100 ( 8% ) = $8.00.

kP = 10%.

V = DP / kP = $8.00 / 10%

4-22

= $80

Common Stock Valuation

Common stock represents a

residual ownership position in the

corporation.

Pro rata share of future earnings

after all other obligations of the

firm (if any remain).

Dividends may be paid out of

the pro rata share of earnings.

4-23

Common Stock Valuation

receive when owning shares of

common stock?

(1) Future dividends

(2) Future sale of the common

stock shares

4-24

Dividend Valuation Model

for the PV of all future dividends.

V= (1 + ke)1 + (1 + ke)2 + ... + (1 + ke)

Divt Divt: Cash dividend

=S (1 + ke)t at time t

t=1

k e: Equity investor’s

required return

4-25

Adjusted Dividend

Valuation Model

The basic dividend valuation model

adjusted for the future stock sale.

V= (1 + ke)1 + (1 + ke)2 + ... + (1 + k )n

e

shares are expected to be sold.

Pricen: The expected share price in year n.

4-26

Dividend Growth

Pattern Assumptions

The dividend valuation model requires the

forecast of all future dividends. The

following dividend growth rate assumptions

simplify the valuation process.

Constant Growth

No Growth

Growth Phases

4-27

Constant Growth Model

dividends will grow forever at the rate g.

V = (1 + k )1 + (1 + k )2 + ... + (1 + k )

e e e

D1 g:

= The constant growth rate.

(ke - g) ke: Investor’s required return.

4-28

Constant Growth

Model Example

Stock CG has an expected growth rate of

8%. Each share of stock just received an

annual $3.24 dividend per share. The

appropriate discount rate is 15%. What

is the value of the common stock?

D1 = $3.24 ( 1 + .08 ) = $3.50

= $50

4-29

Zero Growth Model

dividends will grow forever at the rate g = 0.

D1 D2 D

VZG = + + ... +

(1 + ke)1 (1 + ke)2 (1 + ke)

= ke: Investor’s required return.

ke

4-30

Zero Growth

Model Example

Stock ZG has an expected growth rate of

0%. Each share of stock just received an

annual $3.24 dividend per share. The

appropriate discount rate is 15%. What

is the value of the common stock?

D1 = $3.24 ( 1 + 0 ) = $3.24

= $21.60

4-31

Growth Phases Model

that dividends for each share will grow

at two or more different growth rates.

n D0(1+g1)t Dn(1+g2)t

V =S + S (1 + ke)t

t=1 (1 + ke)t t=n+1

4-32

Growth Phases Model

growth phases model assumes that

dividends will grow at a constant rate g2.

We can rewrite the formula as:

n D0(1+g1)t Dn+1

V =S

1

+

t=1 (1 + ke)t (1 + ke)n (ke - g2)

4-33

Growth Phases

Model Example

Stock GP has an expected growth

rate of 16% for the first 3 years and

8% thereafter. Each share of stock

just received an annual $3.24

dividend per share. The appropriate

discount rate is 15%. What is the

value of the common stock under

this scenario?

4-34

Growth Phases

Model Example

0 1 2 3 4 5 6

D1 D2 D3 D4 D5 D6

starts at time t=0 for 3 years and is followed by 8%

thereafter starting at time t=3. We should view the time

line as two separate time lines in the valuation.

4-35

Growth Phases

Model Example

0 1 2 3 Growth Phase

#1 plus the infinitely

long Phase #2

D1 D2 D3

0 1 2 3 4 5 6

D4 D5 D6

Note that we can value Phase #2 using the

Constant Growth Model

4-36

Growth Phases

Model Example

V3 = D 4

We can use this model because

dividends grow at a constant 8%

k-g rate beginning at the end of Year 3.

0 1 2 3 4 5 6

D4 D5 D6

4-37

Growth Phases

Model Example

0 1 2 3

New Time

Line

D1 D2 D3

0 1 2 3 D4

Where V3 =

V3

k-g

Now we only need to find the first four dividends

to calculate the necessary cash flows.

4-38

Growth Phases

Model Example

Determine the annual dividends.

D0 = $3.24 (this has been paid already)

D1 = D0(1+g1)1 = $3.24(1.16)1 =$3.76

D2 = D0(1+g1)2 = $3.24(1.16)2 =$4.36

D3 = D0(1+g1)3 = $3.24(1.16)3 =$5.06

D4 = D3(1+g2)1 = $5.06(1.08)1 =$5.46

4-39

Growth Phases

Model Example

0 1 2 3

Actual

Values

3.76 4.36 5.06

0 1 2 3 5.46

Where $78 =

.15-.08

78

Now we need to find the present value

of the cash flows.

4-40

Growth Phases

Model Example

We determine the PV of cash flows.

PV(D1) = D1(PVIF15%, 1) = $3.76 (.870) = $3.27

PV(D2) = D2(PVIF15%, 2) = $4.36 (.756) = $3.30

PV(D3) = D3(PVIF15%, 3) = $5.06 (.658) = $3.33

P3 = $5.46 / (.15 - .08) = $78 [CG Model]

PV(P3) = P3(PVIF15%, 3) = $78 (.658) = $51.32

4-41

Growth Phases

Model Example

Finally, we calculate by summing all the

cash flow present values.

V = $61.22

4-42

Behavior of Bond Prices

1. When the market required rate of return is more than the

stated coupon rate, the price of the bond will be less than its

face value. Such a bond is said to be selling at a discount from

face value.

The amount by which the face value exceeds the current price is

the bond discount.

stated coupon rate, the price of the bond will be more than its

face value. Such a bond is said to be selling at a premium over

face value. The amount by which the current price exceeds the

face value is the bond premium.

4-43

Behavior of Bond Prices

3. When the market required rate of return equals the stated

coupon rate, the price of the bond will equal its face value. Such

a bond is said to be selling at par.

4-44

Legal rights of stock

holders

A firm’s common stockholders have the right to elect its

directors, who, in turn, elect the officers who manage the

business. corporations must hold elections of directors

periodically, usually once a year, with the vote taken at the

annual meeting. Each share of stock has one vote. Stockholders

can appear at the annual meeting and vote in person, but

typically they transfer their right to vote to another person by

means of a proxy.

another, typically the power to vote shares of common stock.

4-45

Legal rights of stock

holders

Proxy Fight: If earnings are poor and stockholders are

dissatisfied, an outside group may solicit the proxies in an effort

to overthrow management and take control of the business. This

is known as a proxy fight.

called the preemptive right, to purchase on a pro rata basis any

additional shares sold by the firm.

the management of a corporation from issuing a large number of

additional shares and purchasing those shares itself.

4-46

Legal rights of stock

holders

The second reason for the preemptive right is to protect

stockholders from a dilution of value.

4-47

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