MAF203 Lecture Notes - Lecture 5: Cash Flow, Asteroid Family, Preferred Stock
Document Summary
Intrinsic value of asset = pv of stream of expected cash flows discounted at an appropriate required rate of return. Ordinary shares represent ownership and voting rights holders have residual claims to profits through dividends, and a residual claim to the assets after claims of all other entitled parties are met. Shareholders are more likely than debt holders to lose their investment if the company fails, thus they expect a return that is greater than that received by lending. Advantages of using equity as source of finance. The higher the proportion of capital structure made up by equity, the lower the cost of debt. Issuing more shares can dilute existing shareholders ownership and control. Returns to shareholders can be subject to double taxation. Valuation of shares: dividend valuation model, price-earnings model, capital asset pricing model (capm) Dividend = periodic cash flows from an investment in shares. Assuming dividends continue indefinitely, the value of the share is:
