4-1 Business Finance (MGT 232) Lecture 11

4-2 Stock Valuation

4-3 Yield to Maturity Yield to Call Semiannual Compounding for YTM and YTC Current Yield Overview of the Last Lecture

4-4 Key Differences b/w Bonds and Stocks Points of DifferenceStocksBonds Voice in ManagementYesNo Voting RightsYesNo MaturityNot DefinedDefined ReturnDividend Fixed Interest Payment Claims on Assets/ Income on Liquidation Less PreferencePreference

4-5 Types of Stock Stock Preferred Stock Common Stock Stock with fixed dividend but no voting rights Residual income with voting rights & is a risky Investment

4-6 Preferred Stock Preferred Stock is a type of stock that promises a (usually) fixed dividend, but at the discretion of the board of directors. Hybrid or Quasi security Characteristics of both bonds and stocks Preferred Stock Preferred Stock is a type of stock that promises a (usually) fixed dividend, but at the discretion of the board of directors. Hybrid or Quasi security Characteristics of both bonds and stocks Characteristics of Preferred Stock

4-7 No voting rights Preference over common stock in the payment of dividends Preference over common stock in claims on assets. No voting rights Preference over common stock in the payment of dividends Preference over common stock in claims on assets. Characteristics of Preferred Stock

4-8 Common stock Common stock represents a residual ownership position in the corporation. Voting rights (Proxy and Proxy Fight) Less preference in case of distribution of income Less preference in case of claims on assets. Dividends on the discretion of the BODs. Common stock Common stock represents a residual ownership position in the corporation. Voting rights (Proxy and Proxy Fight) Less preference in case of distribution of income Less preference in case of claims on assets. Dividends on the discretion of the BODs. Characteristics of Common Stock

4-9 Value of any asset is the present value of cash flows expected from it Capital Gain Capital Gain Dividend Gain Dividend Gain Value of any asset is the present value of cash flows expected from it Capital Gain Capital Gain Dividend Gain Dividend Gain Stock Valuation

4-10 Formula: V p = D p / r p P for preferred stock V p = Value / Price of P. Stock D p = Dividend on P. Stock r p = Required rate of return on P. Stock Formula: V p = D p / r p P for preferred stock V p = Value / Price of P. Stock D p = Dividend on P. Stock r p = Required rate of return on P. Stock Preferred Stock Valuation

4-11 Preferred Stock Valuation preferred stock Stock PS has an 8%, Rs.100 par value issue outstanding. The appropriate discount rate is 10%. What is the value of the preferred stock?

4-12 Preferred Stock Example Company pays a dividend on preferred stock at Rs. 10 per share. If the required rate of return on P. stock is 10%

4-13 Common Stock Valuation (1) Future dividends (2) Future sale of the common stock shares (1) Future dividends (2) Future sale of the common stock shares common stock What cash flows will a shareholder receive when owning shares of common stock? Valuation

4-14 Summary Key Differences in Bonds and Stocks Characteristics of P. Stock and C. Stock Stock valuation Preferred Stock Valuation Common Stock Valuation