18-6
Intrinsic Value and Market Price
• Intrinsic Value – Self assigned Value – Variety of models are used for estimation
• Market Price – Consensus value of all potential traders
Vot 1(1 Dkt )t
V0 = Value of Stock Dt = Dividend k = required return
18-9
No Growth Model
D Vo
k
• Stocks that have earnings and dividends that are expected to remain constant
PH = the expected sales price for the stock at time H
H = the specified number of years the stock is expected to be held
18-8
Dividend Discount Models: General Model
P0
D1 kg
பைடு நூலகம்
• If all earnings paid out as dividends, price should be lower (assuming growth opportunities exist)
18-16
Present Value of Growth Opportunities Continued
– Liquidation value – Replacement cost
18-4
Expected Holding Period Return
• The return on a stock investment comprises cash dividends and capital gains or losses – Assuming a one-year holding period
E x p e c te d H P R = E (r) E (D 1 ) E (P 1 ) P 0
P 0
18-5
Required Return
• CAPM gave us required return:
krf E(rM)rf
• If the stock is priced correctly
– Required return should equal expected return
• Trading Signal – IV > MP Buy – IV < MP Sell or Short Sell – IV = MP Hold or Fairly Priced
18-7
Specified Holding Period
V0(1 D k 1)1(1 D k2)2...D (1 H kP )H H
Figure 18.1 Dividend Growth for Two Earnings Reinvestment Policies
18-15
Present Value of Growth Opportunities
• If the stock price equals its IV, growth rate is sustained, the stock should sell at:
18-18
Partitioning Value: Example Continued
gROE b
g = growth rate in dividends ROE = Return on Equity for the firm b = plowback or retention percentage rate
(1- dividend payout percentage rate)
18-14
18-12
Constant Growth Model: Example
Vo Do(1g) kg
E1 = $5.00 b = 40% k = 15% (1-b) = 60% D1 = $3.00 g = 8% V0 = 3.00 / (.15 - .08) = $42.86
18-13
Estimating Dividend Growth Rates
– Preferred Stock
18-10
No Growth Model: Example
Vo D k
E1 = D1 = $5.00 k = .15 V0 = $5.00 /.15 = $33.33
18-11
Constant Growth Model
Vo
Do(1 g ) kg
g = constant perpetual growth rate
CHAPTER 18 Equity Valuation
Models
McGraw-Hill/Irwin
Investments, 8th edition
Bodie, Kane and Marcus
Slides by Susan Hine
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
• Price = No-growth value per share + PVGO (present value of growth opportunities)
P0
E1 k
PVGO
18-17
Partitioning Value: Example
ROE = 20% d = 60% b = 40% E1 = $5.00 D1 = $3.00 k = 15% g = .20 x .40 = .08 or 8%
18-2
18-3
Limitations of Book Value
• Book value is an application of arbitrary accounting rules
• Can book value represent a floor value? • Better approaches