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Distinctions Among Valuation Concepts Bond Valuation Preferred Stock Valuation Common Stock Valuation Rates of Return (or Yields)
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
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. GoingGoing-concern value represents the amount a firm could be sold for as a continuing operating business.
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
4.3
What is Value?
Book value represents either: (1) an asset: the accounting value of an asset the assets cost minus its accumulated depreciation; (2) a firm: total assets minus liabilities and preferred stock as listed on the balance sheet.
4.4
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
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.
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
4.5
A bond is a long-term debt instrument issued by a corporation or government. The maturity value (MV [or face MV) value] of a bond is the stated value. In the case of a US bond, the face value is usually $1,000.
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
4.6
The bonds coupon rate is the stated rate of interest; the annual interest payment divided by the bonds face value. The discount rate (capitalization rate) is dependent on the risk of the bond and is composed of the risk-free rate plus a premium for risk.
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
4.7
V=
I
(1 + kd)1
g
I
(1 + kd)2
+ ... +
I
(1 + kd)g
,g) d
=7
4.8
I
(1 + kd)t
or
t=1
I (PVIFA k
V = I / kd
[Reduced Form]
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
= $1,000 ( 8%) = $80 $80. = 10% 10%. = I / kd [Reduced Form] $800. = $80 / 10% = $800
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
V=
I
(1 + kd)1
n
I
(1 + kd)2
+ ... +
I + MV
(1 + kd)n
=7
4.10
I
(1 + kd)t
+
, n) d
MV
(1 + kd)n
t=1
V = I (PVIFA k
+ MV (PVIF kd, n)
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
V=
4.12
MV
(1 + kd)n
= MV (PVIFk
, n) d
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
4.13
Semiannual Compounding
Most bonds in the US 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
4.14 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Semiannual Compounding
A non-zero coupon bond adjusted for nonsemi-annual compounding.
V =(1 + k =7
4.15
I/2
2 d/2 )1
+(1 + k
)t
I/2
2 d/2 )2
+ ... + + k (1 MV
I / 2 + MV
/2 ) 2*n d 2
2*n n
t=1
I/2
(1 + kd /2 2
(1 + kd /2 ) 2*n 2
)1
+ (1 + k
)t
DivP
P
)2
+ ... +
DivP
(1 + kP)g
,g) P
=7
DivP
(1 + kP
t=1
or DivP(PVIFA k
V = DivP / kP
4.18 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
4.19
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
4.20
V=
Div1
(1 + ke)1
g
Div2
(1 + ke)2
+ ... +
Divg
(1 + ke)g
=7
4.22
Divt
(1 + ke)t
t=1
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
V=
n:
Div1
(1 + ke)1
Div2
(1 + ke)2
Pricen:
4.23
The year in which the firms shares are expected to be sold. The expected share price in year n.
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
V=
D0(1+g)
(1 + ke)1
D0(1+g)2
(1 + ke)2
D 1:
D0(1+g) + ... + (1 + k )g
e
D1 = (ke - g)
4.25
Dividend paid at time 1. The constant growth rate. Investors required return.
g:
ke:
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
D1
(1 + ke)1
D2
(1 + ke)2
D 1: ke:
+ ... +
Dg
(1 + ke)g
=
4.27
D1 ke
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
V =7
4.29
D0(1 + (1 +
g1)t
t=1
ke)t
7 t=n+1
g Dn(1 + g2)t
(1 + ke)t
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
V =7
4.30
D0(1 + g1)t
(1 + ke)t t=1
Dn+1
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Growth of 8% to infinity!
Stock GP has two phases of growth. The first, 16%, 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.
4.32 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
P0 =
I
(1 + kd )t
t=1
MV + (1 + k )n
d
= I (PVIFA k
kd = YTM
4.34
, n) d
+ MV (PVIF kd , n)
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
$100(PVIFA9%,15) + $1,000(PVIF9%, 15) $100(8.061) + $1,000(0.275) $806.10 + $275.00 $1,081.10 [Rate is too high!] high!]
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
$100(PVIFA7%,15) + $1,000(PVIF7%, 15) $100(9.108) + $1,000(0.362) $910.80 + $362.00 $1,272.80 [Rate is too low!] low!]
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
P0 =
7 t=1
I/2
(1 + kd /2 )t
MV
(1 + kd /2 )2n
= (I/2)(PVIFAk
4.38
/2, 2n) d
+ MV(PVIFkd /2 , 2n)
N
Compute
N: I/Y: PV: PMT: FV:
4.40
I/Y
PV
PMT
FV
4.2626% = (kd / 2)
20-year semiannual bond (20 x 2 = 40) Compute -- Solving for the semiannual yield now Cost to purchase is $950 today $40 annual interest (8% x $1,000 face value / 2) $1,000 (investor receives face value in 15 years)
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2nd 8
Bond ENTER
ENTER o = kd
5 Year 15 Year
5 Year 15 Year
5 Year 15 Year
5 Year 15 Year
4.55
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.