W ALL S TREET W EST W ORKSHOP Oct/Nov 2009. O UTLINE Introduction Sources of Data Stock valuation Cost of Capital.

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W ALL S TREET W EST W ORKSHOP Oct/Nov 2009

O UTLINE Introduction Sources of Data Stock valuation Cost of Capital

T ERMINOLOGY Investment Primary market Secondary market Value Income Capital Gain Return Rate of return Risk Speculation Marketability vs. Liquidity

S OURCES OF D ATA Thomson Reuters Bloomberg Worldwide Web

S TOCK V ALUATION PV of all future dividends o Capital Asset Pricing Model

S TOCK V ALUATION - K EY I NPUTS Return Beta Risk Free Rate Market Risk Premium Dividends EPS Payout ratio Assumptions Goal Seek Problems

W EIGHTED AVERAGE C OST OF C APITAL The minimum rate of return that must be earned from investments to ensure the value of the firm does not decrease

W EIGHTED AVERAGE C OST OF C APITAL - COMPONENTS After-tax cost of debt (k d (1-T)) Interest rate on debt less the tax savings Cost should be based on new debt issued rather than existing debt Cost of preferred stock (k ps ) NOTE: P N is the price received after deducting flotation costs

W EIGHTED AVERAGE COST OF CAPITAL - COMPONENTS Cost of equity (k s ) Opportunity cost Alternative measures: Risk-free rate plus risk premium CAPM Bond yield plus risk premium Discounted cash flow

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