Stock Pricing - Salisbury University
Chapter 7 – Equity Markets and Stock Valuation
The price of any financial instrument is the present value of the future cash flows.
Preferred Stock
There is a 6 percent preferred share outstanding. If investors have a required return of 7 percent on this stock, what is the price?
P0 = [pic]
[pic]
Common stock
Assumption: The dividends grow at a constant rate forever. The following equation goes by many names. Here are a few:
Gordon Growth Model
Discounted Dividend Model
Dividend Model
[pic] = [pic]
Suppose a stock will pay a dividend of $2.50 next year and the dividends will grow at 6 percent forever. If the required return is 13 percent, what is the price per share today?
[pic]
Suppose a stock just paid a dividend of $1.80 and the dividends will grow at 6 percent indefinitely. If the required return is 11 percent, what is the current stock price?
[pic] = [pic]
What is the stock price in 8 years?
[pic] = [pic]
P8 = $38.16(1 + .06)8 = $60.82
What is the stock price in 15 years?
[pic] = [pic]
P15 = $38.16(1 + .06)15 = $91.45
Growing Perpetuities
You want to buy a song catalog. The royalties next year will be $1 million, and are expected to decrease by 8 percent per year indefinitely. If you want a 13 percent return, what is the most you should pay for the catalog?
[pic]
Where does g come from?
g = ROE × b
Required Return
We can solve the Gordon Growth Model for R, the required return.
[pic]
We are analyzing a stock with a current price of $25 per share. The current dividend (D0) is $1 per share and is expected to grow at 4.5 percent per year indefinitely. What is the required return for this stock?
[pic]
We will not cover the non-constant growth section.
Read Sections 7.2 and 7.3
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- stock pricing salisbury university
- ratio and accounts analysis cpa diary
- financial statement analysis sample midterm exam
- analyzing companies after acquisitions
- stock trak assignment 1
- analyzing a company
- project 1 analyzing the distribution of stock price changes
- a common sense approach to analyzing bank stocks
- chapter 1 an introduction to financial management
- employee stock options university of washington
Related searches
- zacks research wizard pricing 2016
- bond pricing formula
- xfinity internet only pricing 2019
- xfinity internet pricing only
- bond pricing formula in excel
- comcast internet pricing 2019
- salesforce pricing plans
- salesforce pricing sheet
- salesforce pricing model
- bond pricing example
- xfinity services and pricing pdf
- pricing a bond