Tut 6 Stocks and Their Valuation 2

8/9/2019 Tut 6 Stocks and Their Valuation 2

1/37

Monday 3.00 p.m.

Tutorial 2, Group 5

tocks and Their Valuation

1


2/37

Group Photo

Galen LeeNabil SyukriFeng Yuyun Tay Jie Hao

2


3/37


4/37

$icounte% $i#i%en% &contantgro*th(Intrinsic Value of stock

here i the re4uire% return on tock

/n general

here g i the gro*th rate

Take note thi "etho% *ork only i! an% re"aincontant

6L.. Y/ G0 GL.N


5/37

$icounte% $i#i%en% "etho% &non+contant(

7L.. Y/ G0 GL.N


6/37

)orporate ,aluation 'etho%

To calculate *e "ut -rt -n% 'arket #alue o! Fir"

Fin% ', o! co""on tock

', o! co""on tock8', o! -r"+', o! -r" %ebt an% pre!erre% tock

e then procee% to -n% the intrinic #alue o! the co""on tock

9L.. Y/ G0 GL.N


7/37

)o"parion bet*een "etho%

:L.. Y/ G0 GL.N


8/37

'ultiple Fir" "o%el

P;. ratio

Price per hare; .arning per hare Ho*e#er thi "ay be ub


9/37

'arket .4uilibriu"

No ten%ency to buy or ell

)urrent "arket tock price i e4ual to itintrinic #alue

.?pecte% return 8 re4uire% return

@L.. Y/ G0 GL.N


10/37

1A

!0"2

/ the !ollo*ing e4uation correct !or -n%ing the

#alue o! a contant gro*th tockB .?plainC

#ns$er%NoD the e4uation abo#e i incorrectC

NE/L SY0R/ E/N NR'N


11/37

11

&sin' (iscounted (i)idend Model,

*onstant 'ro$th stock,

Su+stitutin' these euations into the -rst

euation $ill yield%

NE/L SY0R/ E/N NR'N


12/37

12

Sum o Geometric /ro'ression $here%

irst term,

*ommon ratio,

1ntrinsic )alue o stock,

NE/L SY0R/ E/N NR'N


13/37

13

!0"

T*o in#etor are e#aluating G. tock !or

poible purchaeC They agree on the epected

)alue o (!an% alo on the epected uture

di)idend 'ro$th rateC FurtherD they agree on

the riskiness o the stockC Ho*e#erD one

in#etor nor"ally hol% tock !or 2 yearsD

*hile the other hol% tock !or !0 yearsC n

the bai o! the type o! analyi %one in thi

chapterD houl% they both be *illing to pay the

a"e price !or G. tockB .?plainCNE/L SY0R/ E/N NR'N


14/37

16

4hat the t$o in)estors a'ree on%1C .?pecte% #alue o! $1

2C .?pecte% !uture %i#i%en% gro*th rate3C Rikine o! the tock

4hat dierentiates the t$o in)estors%

/n#etor Nor"ally hol% tock !or 2 year/n#etor E Nor"ally hol% tock !or 1A year

Shoul% they both be *illing to pay the a"e

price !or G. tockB

#ns$er%YeD they houl% be *illing to pay thea"e price !or G. tockC

NE/L SY0R/ E/N NR'N


15/37

17

1ntrinsic )alue o stock%

IPreent #alue o! the !uture %i#i%en% e?pecte%

to be generate% by the tock

There!oreD logicallyD i! the t*o in#etor e?pect

the a"e !uture %i#i%en% trea"D an% they

agree on the tock rikineD then they houl%

reach i"ilar concluion a to the tock#alueC

NE/L SY0R/ E/N NR'N


16/37

19

nother *ay to look at thi i by e?a"ining the

intrinic #alue !or"ula !or contant gro*th "o%el

6(!7 i i"ilar becaue they agree on itC 6'7 i alo

i"ilar becaue they agree on the e?pecte% %i#i%en%

gro*th rateC 6rs7 i alo i"ilar becaue !or the a"e

le#el o! rikineD in#etor *ill e?pect the a"e

a"ount o! re4uire% returnC There i no *here in thi

!or"ula that take into account the nor"al %uration

o! hol%ing the tock a it #ariableC HenceD gi#en all

theeD the t*o in#etor *ill be *illing to pay theNE/L SY0R/ E/N NR'N


17/37

/!0"8

$rill )orporation iue% perpetual pre!erre%tock *ith a 7 percent annual %i#i%en%C The

tock currently yiel% 1A percentD an% it par#alue i K12AC

aChat i the pre!erre% tock #alueB

bCSuppoe interet rate rie an% pull thepre!erre% tock yiel% up to 16 percentChat i it ne* "arket #alueB

1: )H.N )H.N


18/37

aChat i the pre!erre% tock #alueB

Fro" the 4uetionD *e can kno*thatPerpetual pre!erre% tock7 annual %i#i%en%

1A current yiel% &(Par #alue8 K12A

1> )H.N )H.N


19/37

/reerred (i)idend 8 Par ,alue ? percentage o! annual%i#i%en%

8 K12A ? 7

8 K9

Since the Pre!erre% $i#i%en% i constantCThere!oreD $18$28$n8$ D an% gro*th o! %i#i%en%D ' 9 0

0ing the !or"ula

9A

#ns % The the preerred stock7s )alue is :;0.00

1@ )H.N )H.N


20/37

bC Suppoe interet rate rie an% pullthe pre!erre% tock yiel% up to 16percentChat i it ne* "arket #alueB

The ne* tock yiel%D 8 16 8 AC16

0ing the !or"ula

n The ne* tock "arket #alue i K62C>9

2A )H.N )H.N


21/37

Tauig Technologie )orporation &TT)(ha been gro*ing at a rate o! 2Apercent per year in recent yearC Thia"e gro*th rate i e?pecte% to lat !oranother 2 yearD then to %ecline to89C

/!0"!8


22/37

/!0"!8


23/37

/!0"!8

$38 $2&1g( 8 K2C3A6&1AC 8 K2C66226

Note Thi i a non contant gro*th tock#aluationC The gro*th rate *a 2A !or 2 yearthen !ell to a contant 9 a!ter*ar% hence%i#i%en% a!ter 2 year *ill =o* at a lo*er rateC

23TY J/. H


24/37

!0 2 3 g82A

g82A

g89

g89

$A8K1C9 $18K1C@2 $28K2C3A6 $38K2C6622 $6 CCMr81A

8

8 K91CA79

&Preent #alue o! !uture %i#i%en%%uring the contant gro*th

perio%(

26TY J/. H


25/37

8

8K76C1A@A@A

8 :5.!!

Re"e"ber that*e ha#eau"e% that $A

ha been pai%Dhence $Anotinclu%e% in ourcalculationC

Stock Price

27TY J/. H


26/37

hat are it e?pecte% %i#i%en% an% capital

gain yiel% at thi ti"eD that iD %uringYear 1BExpected Dividend Yield 8 8

8K1C@2A;K76C11 83.55=

)apital Gain Yiel%8 +

8 1A + 3C778 ;.5=

29TY J/. H


27/37

/!0"!8

No* au"e that TT) perio% o!upernor"al gro*th i to lat !or 7 yearrather than 2 yearC Ho* *oul% thi aOectthe priceD %i#i%en% yiel% an% capital gain

yiel%B n*er in *or% onlyC

2:TY J/. H


28/37

Since the supernormal growth lasts for 5 years, dividends over the 5years will also be much higher since it has been compounded more

times. As a result, thepresent value of the dividend also increases.

Expected dividend yield(rs) !"

# $%

&ith a higher $% for the stoc' with 5 years of supernormal growth as

compared to the one with only years, the expected dividend yield

will be smallersince !" becomes a smaller proportion as compared

to the price.

apital *ain +ield Expected return dividend yield, since dividend

yield is smaller for 5 years of supernatural growth, capital gain yield

will be a greater.2>TY J/. H


29/37

/!0"!8

What will TTCs dividend and capital gainsyields e once its period of supernor!algrowth ends"nce it upernor"al gro*th perio% en%D

TT) tock *ill be a contant gro*th tock*ith gn89 *hich e4ual to the contantgro*th in %i#i%en%Cr8 $i#i%en% Yiel%&( )apital Gain Yiel% &g(

)apital Gain Yiel% 8 g 8 9$i#i%en% Yiel% 8 r g 8 1A+9 8 6

2@TY J/. H


30/37

/!0"!?

Earrett /n%utrie in#et a large u" o! "oney inRQ$D an% a a reult it retain an% rein#et all o!it earningC /n other *or%D Earrett does not payany di)idendsD an% it ha no plan to pay

%i#i%en% in the near !utureC "a


31/37

Becap

*orporate Valuation Model

1t su''ests the )alue o the entire -rm euals thepresent )alue o the -rm7s ree cash @o$s.

* 9 CDE1T


32/37

aC hat i the P, o! the F)F pro


33/37

+C hat i the -r" horion;ter"inal orcontinuing #alueB

0 53 2!

3 19CA7!5

!0

;

'9A=

4#**9!2=

K

LV 9 9 9 :32! million

Lorion Value represents )alue o -rm at the point that 'ro$th +ecomes constant

33F.NG Y0Y0N


34/37

cC hat i the -r" total #alue to%ayB

0 53 2!

3 19CA7!5

!0

;

'9A=

4#**9!2=

K

MV-rm9

9 2.!!3 F

9 :228.!! million

MV o -rm 9 /V o the -rm7s uture *s

36F.NG Y0Y0N


35/37

0 53 2!

3 19CA7!5

!0

;

'9A=

4#**9!2=

K

:32! m

:2.;A?m:.A83m

:A.!!8m

:?.533m

:20.00!m:228.!! m

37F.NG Y0Y0N


36/37

dC hat i an eti"ate o! Earrett price perhareB

MV o common stock 9 MV o -rm H MV o-rm7s de+t and preerred stock

',-r"8 K22>C116 "illion',%ebt an% pre!C tock 8 K9A "illion',co""on tock 8 22>C116 9A 8 K19>C116"illion

39F.NG Y0Y0N


37/37

8

NoC o! hare 8 1A "illion

8 8K19C>11

Lence to -nd the stock7s intrinsic )alue, use theuation%

3:F.NG Y0Y0N

Documents

Tut 6 Stocks and Their Valuation 2