Corporate Finance

12/1/2013

Chapter 8

Stock Valuation

8-1 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Outline

• • • • • Bond and Stock Differences Common Stock Valuation Features of Common Stock Features of Preferred Stock The Stock Markets

8-2

Chapter Outline

• • • • • Bond and Stock Differences Common Stock Valuation Features of Common Stock Features of Preferred Stock The Stock Markets

8-3

1

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Bonds and Stocks: Similarities

• Both provide long-term funding for the organization • Both are future funds that an investor must consider • Both have future periodic payments • Both can be purchased in a marketplace at a price “today”

8-4

Bonds and Stocks: Differences

• From the firm’s perspective: a bond is a long-term debt and stock is equity • From the firm’s perspective: a bond gets paid off at the maturity date; stock continues indefinitely. • We will discuss the mix of bonds (debt) and stock (equity) in a future chapter entitled capital structure

8-5

Bonds and Stocks: Differences

• A bond has coupon payments and a lump-sum payment; stock has dividend payments forever • Coupon payments are fixed; stock dividends change or “grow” over time

8-6

2

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A visual representation of a bond with a coupon payment (C) and a maturity value (M)

1 2 3 4 5

$C1

$C2

$C3

$C4

$C5 $M

8-7

A visual representation of a share of common stock with dividends (D) forever

1 2 3 4 5

∞

$D1

$D2

$D3

$D4

$D5 $D∞

8-8

Comparison Valuations

0 1

Bond

2

3

P0

C

C

C M

0

Common Stock

1 2 3

P0

8-9

D1

D2

D3

D∞

3

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Notice these differences:

• The “C’s” are constant and equal • The bond ends (year 5 here) • There is a lump sum at the end

1 2 3 4 5

$C1

$C2

$C3

$C4

$C5 $M

8-10

Notice these differences:

• The dividends are different • The stock never ends • There is no lump...