Jeff Cahn & Tom Mrjenovich Stock Valuation Jeff Cahn & Tom Mrjenovich
Why Own Common Stock? Capital Gains – Increase in stocks price Dividends – Monthly, quarterly, or yearly payouts of a corporations earnings. Not all corporations pay dividends
Valuation The stocks price is the present value of the expected future dividends plus the present value of any capital gains.
Dividend Discount Models Zero-Growth Model Constant-Growth Model Multiple-Growth Model
Zero-Growth Model Assumption- Future dividend payouts remain constant Infinite Holding Period V=D1 / k Finite Holding Period V= D1 / (1+k)+ D2 / (1+k)2 + … + Dt+Pt/ (1+k)t V= price of stock, D0= Previous years dividends, Dn= future dividends, k= discount rate, g= dividend growth rate.
Example 1 You want to buy xyz corporations stock today. You plan to sell it in 2 years. It will pay a dividend of $2.00 per year over the next two years (at the end of each year). The stock price at the end of year 2 will be $15.00. The discount rate is 8%, how much should you pay for the stock?
Solution 1 V= D1 / (1+k)+ D2+P2 / (1+k)2 V=
Constant Growth Model Assumption- Future dividend payouts grow at a constant rate. Infinite holding period V=D1 / (k-g) Finite holding period V= D1/ (1+k)+ (D1*(1+g)t-1 ) / (1+k)t + … + D1*(1+g) t-1+Pt/ (1+k)t
Example 2 You want to buy xyz corporation today. XYZ corporation paid a dividend of $2.00 yesterday. Assuming their dividend will grow 2% per year forever and a discount rate 8%, what is a fair price?
Solution 2 V=D1 / (k-g) D1= D0*(1+g) V=
Multiple-Growth Model Assumption- forecast dividends for the first few years until you believe they will grow at a constant rate. T V=Σ D1 / (1+k)t+ DT+1 / (k-g)(1+k)t t=1
Example 3 You want to buy xyz corporation stock today. You forecast they will pay a dividend of $2.00 in year 1, $1.50 in year 2, and $3.00 in year 3. From year 3 onwards they will have a growth rate of 2% and a discount rate of 8%. What would you be willing to pay?
Solution 3 T V=Σ D1 / (1+k)t+ DT+1 / (k-g)(1+k)t t=1 V=
Questions?