FINC-220 Lecture Notes - Lecture 7: Stock Valuation, Preferred Stock, Cash Flow
Document Summary
Chapter outline: bond and stock differences, common stock valuation, features of common stock, features of preferred stock, the stock markets. Bonds and stocks: similarities, both provide long-term funding for the organization, both have future periodic payments, both can be purchased in a marketplace at a price today , differences, debt vs . Ownership: bonds matures vs. stock continues indefinitely, interest (coupon) and lump sum vs. dividend forever, interest is fixed vs. dividend can change. In addition to the dividend in one year, you expect a dividend of . 10 in two years and a stock price of . 70 at the end of year. Constant dividend- zero growth: the firm will pay a constant dividend forever, this is like preferred stock, the price is computed using the perpetuity formula, p0 = d / r. Example: zero growth: example: suppose a stock is expected to pay a dividend each period, forever, and the required return is 10%.
