FIN 300 Chapter Notes - Chapter 8: Stock Valuation, Proxy Fight, Canadian Business

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greensheep522

7 Nov 2016

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Fin300 chapter 8: stock valuation (textbook notes) If you buy the stock today and sell it at the end of the year, you will have a total of in cash. Instead, suppose that we somehow knew the price in two periods, p2. Given a predicted dividend in two periods, d2, the stock price in one period would be. If we were to substitute this expression for p1 into our expression for p0, we would have: now we need to get a price in two periods. We don"t know this either, so we can procrastinate again and write: If we substitute this back in for p2, we would have: notice that we can push the problem of coming up with the stock price off into the future forever. Importantly, no matter what the stock price is, the present value is essentially zero if we push it far enough away.

Related Questions

Supose Acap Corporation will pay a dividend of $2.75 per share at the end of this year and $3.09 per share next year. You expect Acap's stock price to be $53.54 in two years. Assume that Acap's equity cost of capital is 10.5%.

A. What price would you be willing to pay for a share of Acap stock today, if you planned to hild the stock for two years?

B. Suppose instead you plan to hold the stock for one year. For what pice would you expect to be able to sell a share of Acap stock in one year?

C. Given your answer in (B), what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one year? How does this compare to your answer in (A)?

Your broke offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.00 yesterday. Bahnsen's dividend is expected to grow at 5% per year for the next 3 years. If you buy the stock, you plan to hold it for 3 years and then sell it. The appropriate discount rate is 12%.

a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, D3. Note that D0 = $2.00.

b. Given that the first dividend payment willl occur 1 year from now, find the present value of the dividen stream; that is, calculate the PVs of D1, D2, D3 and then sum these PVs.

c. You expect the price of the stock 3 years from now to be $34.73; that is, you expect P3 to equal $34.73. Discounted at a 12% rate, what is the present value of this expected furture stock price? In other words, calculate the PV of $34.73.

d. If you plan to buy the stock, hold it for 3 years, and then sell it for $34.73, what is the most you should pay for it today?

e. Calculate the present value of this stock. Assume that g = 5% and that it is constant.

f. Is the value of this stock dependent upon how long you plan to hold it? In other words, if your planned holding period was 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P0? Explain.

redant669

Assume IBM is expected to pay a total cash dividend of $3.60 next year and dividends are expected to grow indefinitely by 3 percent a year. Assume the required rate of return (i.e. equity holder's opportunity cost of capital) is 9 percent. Assuming this is the best information available regarding the future of this firm, what would be the most economically rational value of the stock today (i.e. today's "price")?

a. 0.60

b. 120.00

c. 60.00

d. 92.70

e. 40.00

2. Someone offers to sell to you a financial contract that will pay $90 at the end of each of the next five years, plus an additional $1000 at the end of the fifth year. If they will sell the contract for $950, what rate of return are they offering on the investment?

10.3%

7.7%

9.6%

52.6% ((90*5+1000)/950 -1)

insufficient information to estimate a return rate

3. The semi-annual interest payments that corporate bonds in the U.S. typically pay are conventionally referred to as

yield payments

coupon payments

call payments

premium payments

dividends

4. Assume that the expected future dividends (D) at end of periods 1,2, and 3, as well as the expected future price (P) at end of period 3 for a stock are as follows: D₁ = $1.20, D₂ = $1.40, D₃ = $1.55, and P₃ = $80.00. What should be the stock's expected price today, (i.e. P₀ )? I encourage you to draw a time line clearly indicating the situation. Assume the required return is 8.6 percent.

87.15

66.96

79.14

65.96

68.40

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FIN 300 Chapter Notes - Chapter 8: Stock Valuation, Proxy Fight, Canadian Business

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