8-3
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.
8-11
Our Task: To value a share of
Common Stock
8-12
And how will we accomplish our task?
8-13
B Bring
A All
E Expected
F Future
E Earnings
I Into
P Present
V Value
8-10
Chapter Outline
• Bond and Stock Differences • Common Stock Valuation • Features of Common Stock • Features of Preferred Stock • The Stock Markets
• Coupon payments are fixed; stock dividends change or “grow” over time
8-5
A visual representation of a bond with a coupon payment (C) and a maturity value (M)
8-14
T Terms
Just remember:
BAEFEIPVT
8-15
Cash Flows for Stockholders
If you buy a share of stock, you can receive cash in two ways:
1. The company pays dividends
• We will discuss the mix of bonds (debt) and stock (equity) in a future chapter entitled capital structure
8-4
Bonds and Stocks: Differences
• A bond has coupon payments and a lump-sum payment; stock has dividend payments forever
Bond
0
1
2
3
P0
C
C
C
M
Common Stock
0
1
2
3
P0
D1
D2
D3 D∞
8-8
Notice these differences:
• The “C’s” are constant and equal • The bond ends (year 5 here) • There is a lump sum a$C1 $C2 $C3 $C4 $C5 $M
8-6
A visual representation of a share of common stock with dividends (D) forever
1
2
34
5∞
$D1 $D2 $D3 $D4 $D5 $D∞
8-7
Comparison Valuations
2. You sell your shares, either to another investor in the market or back to the company
8-16
One-Period Example
Receiving one future dividend and one future selling price of a share of common stock
If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay?
Chapter Outline
• Bond and Stock Differences • Common Stock Valuation • Features of Common Stock • Features of Preferred Stock • The Stock Markets
8-1
Chapter Outline
8-17
One-Period Example
Suppose you are thinking of purchasing the stock of Moore Oil, Inc. You expect it to pay a $2 dividend in one year, and you believe that you can sell the stock for $14 at that time.
1
2
34
5
$C1 $C2 $C3 $C4 $C5 $M
8-9
Notice these differences:
• The dividends are different • The stock never ends • There is no lump sum
1
2
34
5∞
$D1 $D2 $D3 $D4 $D5 $D∞
• 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”
• Bond and Stock Differences • Common Stock Valuation • Features of Common Stock • Features of Preferred Stock • The Stock Markets
8-2
Bonds and Stocks: Similarities