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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
12/1/2013
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...