Download - Tut 6 Stocks and Their Valuation 2
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Monday 3.00 p.m.
Tutorial 2, Group 5
tocks and Their Valuation
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Group Photo
Galen LeeNabil SyukriFeng Yuyun Tay Jie Hao
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$icounte% $i#i%en% &contantgro*th(Intrinsic Value of stock
here i the re4uire% return on tock
/n general
here g i the gro*th rate
Take note thi "etho% *ork only i! an% re"aincontant
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$icounte% $i#i%en% "etho% &non+contant(
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)orporate ,aluation 'etho%
To calculate *e "ut -rt -n% 'arket #alue o! Fir"
Fin% ', o! co""on tock
', o! co""on tock8', o! -r"+', o! -r" %ebt an% pre!erre% tock
e then procee% to -n% the intrinic #alue o! the co""on tock
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)o"parion bet*een "etho%
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'ultiple Fir" "o%el
P;. ratio
Price per hare; .arning per hare Ho*e#er thi "ay be ub
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'arket .4uilibriu"
No ten%ency to buy or ell
)urrent "arket tock price i e4ual to itintrinic #alue
.?pecte% return 8 re4uire% return
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1A
!0"2
/ the !ollo*ing e4uation correct !or -n%ing the
#alue o! a contant gro*th tockB .?plainC
#ns$er%NoD the e4uation abo#e i incorrectC
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&sin' (iscounted (i)idend Model,
*onstant 'ro$th stock,
Su+stitutin' these euations into the -rst
euation $ill yield%
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Sum o Geometric /ro'ression $here%
irst term,
*ommon ratio,
1ntrinsic )alue o stock,
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T*o in#etor are e#aluating G. tock !or
poible purchaeC They agree on the epected
)alue o (!an% alo on the epected uture
di)idend 'ro$th rateC FurtherD they agree on
the riskiness o the stockC Ho*e#erD one
in#etor nor"ally hol% tock !or 2 yearsD
*hile the other hol% tock !or !0 yearsC n
the bai o! the type o! analyi %one in thi
chapterD houl% they both be *illing to pay the
a"e price !or G. tockB .?plainCNE/L SY0R/ E/N NR'N
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4hat the t$o in)estors a'ree on%1C .?pecte% #alue o! $1
2C .?pecte% !uture %i#i%en% gro*th rate3C Rikine o! the tock
4hat dierentiates the t$o in)estors%
/n#etor Nor"ally hol% tock !or 2 year/n#etor E Nor"ally hol% tock !or 1A year
Shoul% they both be *illing to pay the a"e
price !or G. tockB
#ns$er%YeD they houl% be *illing to pay thea"e price !or G. tockC
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1ntrinsic )alue o stock%
IPreent #alue o! the !uture %i#i%en% e?pecte%
to be generate% by the tock
There!oreD logicallyD i! the t*o in#etor e?pect
the a"e !uture %i#i%en% trea"D an% they
agree on the tock rikineD then they houl%
reach i"ilar concluion a to the tock#alueC
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nother *ay to look at thi i by e?a"ining the
intrinic #alue !or"ula !or contant gro*th "o%el
6(!7 i i"ilar becaue they agree on itC 6'7 i alo
i"ilar becaue they agree on the e?pecte% %i#i%en%
gro*th rateC 6rs7 i alo i"ilar becaue !or the a"e
le#el o! rikineD in#etor *ill e?pect the a"e
a"ount o! re4uire% returnC There i no *here in thi
!or"ula that take into account the nor"al %uration
o! hol%ing the tock a it #ariableC HenceD gi#en all
theeD the t*o in#etor *ill be *illing to pay theNE/L SY0R/ E/N NR'N
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$rill )orporation iue% perpetual pre!erre%tock *ith a 7 percent annual %i#i%en%C The
tock currently yiel% 1A percentD an% it par#alue i K12AC
aChat i the pre!erre% tock #alueB
bCSuppoe interet rate rie an% pull thepre!erre% tock yiel% up to 16 percentChat i it ne* "arket #alueB
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aChat i the pre!erre% tock #alueB
Fro" the 4uetionD *e can kno*thatPerpetual pre!erre% tock7 annual %i#i%en%
1A current yiel% &(Par #alue8 K12A
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/reerred (i)idend 8 Par ,alue ? percentage o! annual%i#i%en%
8 K12A ? 7
8 K9
Since the Pre!erre% $i#i%en% i constantCThere!oreD $18$28$n8$ D an% gro*th o! %i#i%en%D ' 9 0
0ing the !or"ula
9A
#ns % The the preerred stock7s )alue is :;0.00
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bC Suppoe interet rate rie an% pullthe pre!erre% tock yiel% up to 16percentChat i it ne* "arket #alueB
The ne* tock yiel%D 8 16 8 AC16
0ing the !or"ula
n The ne* tock "arket #alue i K62C>9
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Tauig Technologie )orporation &TT)(ha been gro*ing at a rate o! 2Apercent per year in recent yearC Thia"e gro*th rate i e?pecte% to lat !oranother 2 yearD then to %ecline to89C
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$38 $2&1g( 8 K2C3A6&1AC 8 K2C66226
Note Thi i a non contant gro*th tock#aluationC The gro*th rate *a 2A !or 2 yearthen !ell to a contant 9 a!ter*ar% hence%i#i%en% a!ter 2 year *ill =o* at a lo*er rateC
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!0 2 3 g82A
g82A
g89
g89
$A8K1C9 $18K1C@2 $28K2C3A6 $38K2C6622 $6 CCMr81A
8
8 K91CA79
&Preent #alue o! !uture %i#i%en%%uring the contant gro*th
perio%(
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8
8K76C1A@A@A
8 :5.!!
Re"e"ber that*e ha#eau"e% that $A
ha been pai%Dhence $Anotinclu%e% in ourcalculationC
Stock Price
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hat are it e?pecte% %i#i%en% an% capital
gain yiel% at thi ti"eD that iD %uringYear 1BExpected Dividend Yield 8 8
8K1C@2A;K76C11 83.55=
)apital Gain Yiel%8 +
8 1A + 3C778 ;.5=
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No* au"e that TT) perio% o!upernor"al gro*th i to lat !or 7 yearrather than 2 yearC Ho* *oul% thi aOectthe priceD %i#i%en% yiel% an% capital gain
yiel%B n*er in *or% onlyC
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Since the supernormal growth lasts for 5 years, dividends over the 5years will also be much higher since it has been compounded more
times. As a result, thepresent value of the dividend also increases.
Expected dividend yield(rs) !"
# $%
&ith a higher $% for the stoc' with 5 years of supernormal growth as
compared to the one with only years, the expected dividend yield
will be smallersince !" becomes a smaller proportion as compared
to the price.
apital *ain +ield Expected return dividend yield, since dividend
yield is smaller for 5 years of supernatural growth, capital gain yield
will be a greater.2>TY J/. H
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What will TTCs dividend and capital gainsyields e once its period of supernor!algrowth ends"nce it upernor"al gro*th perio% en%D
TT) tock *ill be a contant gro*th tock*ith gn89 *hich e4ual to the contantgro*th in %i#i%en%Cr8 $i#i%en% Yiel%&( )apital Gain Yiel% &g(
)apital Gain Yiel% 8 g 8 9$i#i%en% Yiel% 8 r g 8 1A+9 8 6
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Earrett /n%utrie in#et a large u" o! "oney inRQ$D an% a a reult it retain an% rein#et all o!it earningC /n other *or%D Earrett does not payany di)idendsD an% it ha no plan to pay
%i#i%en% in the near !utureC "a
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Becap
*orporate Valuation Model
1t su''ests the )alue o the entire -rm euals thepresent )alue o the -rm7s ree cash @o$s.
* 9 CDE1T
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aC hat i the P, o! the F)F pro
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+C hat i the -r" horion;ter"inal orcontinuing #alueB
0 53 2!
3 19CA7!5
!0
;
'9A=
4#**9!2=
K
LV 9 9 9 :32! million
Lorion Value represents )alue o -rm at the point that 'ro$th +ecomes constant
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cC hat i the -r" total #alue to%ayB
0 53 2!
3 19CA7!5
!0
;
'9A=
4#**9!2=
K
MV-rm9
9 2.!!3 F
9 :228.!! million
MV o -rm 9 /V o the -rm7s uture *s
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0 53 2!
3 19CA7!5
!0
;
'9A=
4#**9!2=
K
:32! m
:2.;A?m:.A83m
:A.!!8m
:?.533m
:20.00!m:228.!! m
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dC hat i an eti"ate o! Earrett price perhareB
MV o common stock 9 MV o -rm H MV o-rm7s de+t and preerred stock
',-r"8 K22>C116 "illion',%ebt an% pre!C tock 8 K9A "illion',co""on tock 8 22>C116 9A 8 K19>C116"illion
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8
NoC o! hare 8 1A "illion
8 8K19C>11
Lence to -nd the stock7s intrinsic )alue, use theuation%
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