...In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall. In the view of fundamental analysis, stock valuation based on fundamentals aims to give an estimate of their intrinsic value of the stock, based on predictions of the future cash flows and profitability of the business. Fundamental analysis may be replaced or augmented by market criteria – what the market will pay for the stock, without any necessary notion of intrinsic value. These can be combined as "predictions of future cash flows/profits (fundamental)", together with "what will the market pay for these profits?" These can be seen as "supply and demand" sides – what underlies the supply (of stock), and what drives the (market) demand for stock? In the view of others, such as John Maynard Keynes, stock valuation is not a prediction but a convention, which serves to facilitate investment and ensure that stocks are liquid, despite being underpinned by an illiquid business and its illiquid investments, such as factories. Contents [hide]...
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...Stock Valuation Peachtree Securities, Inc. (B) Laura Donahue, the recently hired utility analyst for Peachtree Securities, passed her first assignment with flying colors. After presenting her seminar on risk and return, any customers where clamoring for a second lecture. Therefore, Jake Taylor, Peachtree’s president, gave Donahue her second task: determine the value of TECO Energy’s securities (common stock, preferred stock, and bonds) and prepare a seminar to explain the valuation process to the firm’s customers. To begin, Donahue reviewed the Value Line Investment Survey data. Next Donahue examined Teco’s latest Annual Report, especially Note E to the Consolidated Financial Statements. This note lists TECO’s long-term debt obligations, including its first-mortgage bonds, installment contracts, and term loans. Table 1 contains information on three of the first-mortgage bonds listed in the Annual Report. Table 1 Partial Long Term Debt Listing for TECO Energy Face Amount Coupon Rate Maturity Year Years to Maturity $ 48,000,000 4 1/2% 1997 5 32,000,000 8 ¼ 2007 15 100,000,000 12 5/8 2017 25 Note: The terms stated here are modified slightly from the actual terms to simplify the case. A concern which immediately occurred to Donahue was the phenomenon of “event risk.” Recently, many investors have shied away from the industrial bond market because of the wave of leveraged buyouts (LBOs) and debt-financed corporate takeovers that took place during the 1980s...
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...CHAPTER 7 STOCKS AND THEIR VALUATION (Difficulty: E = Easy, M = Medium, and T = Tough) Multiple Choice: Conceptual Easy: Required return Answer: d Diff: E [i]. If the expected rate of return on a stock exceeds the required rate, a. The stock is experiencing supernormal growth. b. The stock should be sold. c. The company is probably not trying to maximize price per share. d. The stock is a good buy. e. Dividends are not being declared. Constant growth model Answer: a Diff: E [ii]. Which of the following statements is most correct? a. The constant growth model takes into consideration the capital gains earned on a stock. b. It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant. c. Two firms with the same dividend and growth rate must also have the same stock price. d. Statements a and c are correct. e. All of the statements above are correct. Constant growth model Answer: a Diff: E [iii]. Which of the following statements is most correct. a. The stock valuation model, P0 = D1/(rs - g), can be used for firms which have negative growth rates. b. If a stock has a required rate of return rs = 12 percent, and its dividend grows at a constant rate of 5 percent, this implies that the stock’s dividend yield is 5 percent. c. The price of a stock is the present value of all expected future...
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...Chapter 7 Stock Valuation Solution to Problems P7-1. LG 2: Authorized and Available Shares Basic Maximum shares available for sale Authorized shares 2,000,000 Less: Shares outstanding 1,400,000 Available shares 600,000 $48,000,000 = 800,000 shares (b) Total shares needed = $60 The firm requires an additional 200,000 authorized shares to raise the necessary funds at $60 per share. (c) Aspin must amend its corporate charter to authorize the issuance of additional shares. (a) P7-2. LG 2: Preferred Dividends Intermediate (a) $8.80 per year or $2.20 per quarter (b) $2.20 For a noncumulative preferred only the latest dividend has to be paid before dividends can be paid on common stock. (c) $8.80 For cumulative preferred all dividends in arrears must be paid before dividends can be paid on common stock. In this case the board must pay the 3 dividends missed plus the current dividend. P7-3. LG 2: Preferred Dividends Intermediate A B C D E $15.002 $8.80 $11.00 $25.504 $8.10 quarters in arrears plus the latest quarter only the latest quarter only the latest quarter quarters in arrears plus the latest quarter only the latest quarter Chapter 7 Stock Valuation 171 P7-4. LG 2: Convertible Preferred Stock Challenge (a) Conversion value = conversion ratio × stock price = 5 × $20 = $100 (b) Based on comparison of the preferred stock price versus the conversion value the investor should convert. If converted, the investor has $100 of value versus only $96 if she...
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...Stock Valuation Using Online Data The goal of this exercise is to use the discounted cash flow model to estimate the intrinsic value of a particular stock, to perform sensitivity analysis, and to determine whether a stock is currently undervalued, overvalued, or appropriately valued. 1.) Find an estimate of the risk-free rate by using www.bloomberg.com. Use the yield to maturity for 30-year U.S. Treasury bond. Hit the markets tab, click on link to government bonds. Be sure not to use the coupon rate. The yield to maturity for the 30-year U.S. Treasury bond is 3.43 as of April 3, 2012 at 3:08 pm. | COUPON | MATURITY | PRICE/YIELD | PRICE/YIELD CHANGE | TIME | 30-Year | 3.125 | 02/15/2042 | 94-08+ / 3.43 | -1-28 / 0.104 | 15:58 | 2.) Value one share of Walgreen. Use the Yahoo! Finance site (Key statistics tab) to find the stock's beta and the next dividend paid (forward dividend). Be sure not to confuse the dividend with the dividend yield. Stock Price History | Beta: | 1.26 | Forward Annual Dividend Rate4: | 0.90 | 3.) Studies indicate that the market risk premium ranges from 4% to 8%. Assume a market risk premium of 6%. Using the data obtained in (1) and (2) use CAPM to determine the required rate of return for this stock. Rf + B (Rm - Rf) Required Return: 3.43 + 1.26 (6 – 3.43) = 6.67% 4.) Estimate the stock's future dividend growth rate. Go to the www.reuters.com website and click on markets and then stocks. Type in the name of Walgreens and select...
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...Stock valuation Secondary markets are markets where investors purchase securities from other investors, rather than from issuing companies themselves. Secondary markets are important because they enable investors to convert securities easily to cash. In the United States, most secondary market transactions are accomplished on one of the numerous stock exchanges the NYSE or NASDAQ. 1. NYSE: is the oldest, largest, and best-known stock exchange market in the United States, which was founded in 1792. It is located on Wall Street New York city and lists over 2500 companies. 2. NASDAQ: was created in 1971 and is the world's first electronic stock market. NASDAQ is a computerized system that facilitates trading of stock and provides quotes for Over-the-Counter (OTC) stocks not listed on other markets. NASDAQ is an acronym for National Association of Securities Dealers Automated Quotation. Unlike NYSE, NASDAQ does not have a physical trading place that brings together buyers and sellers. Instead, all trading on the NASDAQ exchange is done via a network of computers and telephones There exist four types of secondary market. 1. Direct Search: is a secondary market that provides the least amount of price information and the buyers and sellers are required to search each other out directly. Because the entire cost of finding and bargaining with potential and desired trading partner is paid by just one party, there is only a small incentive to search among all possible partners...
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...examination, and make stock suggestions. Analysts assemble and practice a variety of information about numerous stocks, from their intrinsic values comparative to their up to date market prices, from their valuation multiples and to conclude with the rate the investment prospective of every stock. In this research paper, I as an investment analyst will inspect Pepsi company’s analyst predilections across stocks, and estimate the sources of the investment worth presented by analyst stock recommendations and its changes for the particular company. II. What is Stock Valuation Stock valuation is a method of estimating the average intrinsic value of a stock by applying fixed formulas that cause in numerous financial indicators. Every firm has an intrinsic value also known as strike price of a company, and that strike price is based on the quantity of free cash flow they can give throughout their effectual era. A forecaster (analyst) valuing the corporation possibly will look at company’s administration, the composition of its capital structure, expectation of future earnings, and market importance of resources (assets). According to Nguyen (n.d.), “When trying to figure out which valuation method to use to value a stock for the first time, most investors will quickly discover the overwhelming number of valuation techniques available to them today”. Now a days, it is very easy for investors to understand the best stock valuation technique to find out the value of stocks because of devastating...
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...CHAPTER 7 STOCKS AND THEIR VALUATION (Difficulty: E = Easy, M = Medium, and T = Tough) Multiple Choice: Conceptual Easy: Required return Answer: d Diff: E [i]. If the expected rate of return on a stock exceeds the required rate, a. The stock is experiencing supernormal growth. b. The stock should be sold. c. The company is probably not trying to maximize price per share. d. The stock is a good buy. e. Dividends are not being declared. Constant growth model Answer: a Diff: E [ii]. Which of the following statements is most correct? a. The constant growth model takes into consideration the capital gains earned on a stock. b. It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant. c. Two firms with the same dividend and growth rate must also have the same stock price. d. Statements a and c are correct. e. All of the statements above are correct. Constant growth model Answer: a Diff: E [iii]. Which of the following statements is most correct. a. The stock valuation model, P0 = D1/(rs - g), can be used for firms which have negative growth rates. b. If a stock has a required rate of return rs = 12 percent, and its dividend grows at a constant rate of 5 percent, this implies that the stock’s dividend yield is 5 percent. c. The price of a stock is the present value of all expected future...
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...Topic Two ------------------------------------------------- Time Value of Money, Bond and Stock Valuation Ivelisse Rodriguez Investing in the stock market is one of the most profitable and riskiest kinds of investments. However, a convectional investor aspires at gaining money on the market but what it the most important key for investor succeed in the stock investing? The answer is simple, it is knowledge in investing. Usually losses in investing happen because of lack of knowledge, over confidence, impatience, greed, far, and different delusions. An experienced investor knows that there is a direct proportion between time spent to increase investing skills and return on investment. Looking for an industry or company on where investor should invest, I found cable industry and Comcast Corp. is the nation’s leading cable TV provider, with 22.3 million video subscribers in 39 states and the District of Columbia. Internet service has 18.1 million subs; phone service, 9.3 million. Also has 51%-stake in NBC Universal joint venture, which includes major broadcast and cable networks (NBC,Bravo, USA), film studios (Universal Pictures), digital media, and resort parks. (www.comcast.net). Value line report states that Comcast has Timeliness 1 which representing the highest score achievable and a positive returns in the future. The ranking of Safety and Technical are considerate in a comfort zone, following for a Beta under 1. The Comcast Analysis value line report instates...
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...Chapter 5 (Basic Stock Valuation): Problems (Page 182-183): #1, #2, #4, #6, #8, #9 #11, #12, and #13. 5-1 ∵ Last dividend (D0) $1.50 First 3 year growth rate 5% Long-run growth rate 10% ∴ g = 5% g = 10% Year 0 1 2 3 4 5 Dividend $1.50 $1.50(1.05) $1.50(1.05)2 $1.50(1.05)3 $1.74(1.1) $1.91(1.1) $1.50 $1.58 $1.65 $1.74 $1.91 $2.11 5-2 (Hint: Find the intrinsic value of the common stock if the dividends are expected to grow at a constant rate) ∵ Dividend at the end of the year (D1) $1.50 Constant growth rate (g) 7% Required rate of return (rS) 15% ∴ The value per share of the company’s stock (＾P0) = D1 / (rs – g) = $1.50 / (15% - 7%) = $18.75. 5-4 ∵ Preferred dividend (DPS) $5 Value of preferred stock (VPS) $50 ∴ Required rate of return (rPS) = DPS / VPS = $5 / $50 = 0.10 = 10%. 5-6 ∵ Price (＾P0) $80 A year-end dividend (D1) $4 Required rate of return (rS) 14% ∴ g = rS – (D1 / P0) = 14% - ($4 / $80) = 9% 5-8 ∵ Preferred dividend (DPS) $100 * 8% = $8 Current market price (VPSa) $60 (VPSb) $80 (VPSc) $100 (VPSd) $140 ∴ Nominal rate of return: ra = DPS / VPSa = $8 / $60 = 13.33% rb = DPS / VPSb = $8 / $80 = 10.00% rc = DPS / VPSc = $8 / $100 = 8.00% rd = DPS / VPSd = $8 / $140 = 5.71% 5-9 (Hint: the growth rate of the dividends is negative) ∵ g = - 4% D0 = $5 rS = 15% ∴ The value of Brushy Mountain’s stock (＾P0) = D0 (1 + g) / (rs – g) = $5 (1 – 4%) / (15% + 4%) = $25.26. 5-11 (Hint:...
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...The two stocks I chose for the sell-side analyst are Fitbit Inc. (FIT) and CB Richard Ellis Group, Inc. (CBG). Through intensive research and evaluation of the two stocks I strongly believe that FIT will underperform the S&P 500 and CBG will outperform the S&P 500. I believe that CBG will outperform the S&P 500 in the coming fiscal year based on the firm’s strong background, prior history, and comparative advantage. I believe that FIT will underperform the S&P 500 in the coming fiscal year due to its recent stock decline, lack of innovation, and the credibility of its well-known competitors. CB Richard Ellis Group Inc., or simply CBRE, is a worldwide real estate services & investment firm that serves real estate owners, investors, and occupiers throughout the world. In short, CBRE offers strategic and execution advice for a multitude of real estate properties and investments. According to CBRE’s website, “CBRE consists of 70,000 professionals whom provide outcomes for clients in 60+ countries”, based off this information it is clear that CBRE is an enormous firm that is continually expanding and improving. According to CBRE’s official website it had substantial revenues of around $10.9 billion. Based on the company’s recent history it’s quite evident that CBRE is one of the most dominant firms in its field for numerous reasons. For one, its size, CBRE Group, Inc. is the world’s largest commercial and real estate services and investment firms. Not only is this firms size quite...
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...“Stock Valuation” Soal | Jawaban dan Solusi : 1. Nilai berdasarkan tingkat pengembalian yang disyaratkan adalah sebagai berikut : * Obligasi Vb = $140(6.194) + $1000(0.257) Vb = $867.16 + $257 Vb = $1124.16 * Saham Preferen Karena besarnya dividen konstan setiap tahun tanpa tanggal jatuh tempo, maka persamaannya menjadi : Vps = $85.71 * Saham Biasa * Langkah Pertama : Estimasi tingkat pertumbuhan Pendapatan perusahaan ini meningkat dua kali lipat ($4 to $8) dalam sepuluh tahun. Dari tabel berikut, untuk $1 kenaikan mendekati dua kali lipat (1.9672) dalam 10 tahun, dapat dilihat peningkatannya adalah 7%. Sehingga dapat disimpulkan bahwa tingkat pertumbuhan (g) = 7% * Langkah kedua : Menyelesaikan nilainya Jika diasumsikan tingkat pertumbuhan 7% adalah kontan, maka persamaannya menjadi : Vcs = $3.21/)0.13 Vcs = 24.69 2. Nilai Intrinsik Nilai Pasar Obligasi $1124.16 $1200 Saham Preferen $85.71 $80 Saham Biasa $24.69 $25 Dari hasil diatas, dapat dilihat bahwa nilai intrinsik obligasi dan saham biasa lebih rendah dari nilai pasar, sehingga disarankan untuk tidak membeli obligasi dan saham biasa tersebut. Sementara untuk saham preference, nilai intrinsiknya lebih besar dari nilai pasar, sehingga kita dapat membeli saham preferen di pasar sebagai investasi. 3. Berikut Perhitungannya : * Obligasi Vb = $140(5.660) + $1000(0.208) Vb = $792.40 + $208 Vb = $1000 * Kita disarankan...
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...6 • DEC. 2001 The Stock Market Valuation of Research and Development Expenditures LOUIS K. C. CHAN, JOSEF LAKONISHOK, and THEODORE SOUGIANNIS* ABSTRACT We examine whether stock prices fully value firms’ intangible assets, specifically research and development ~R&D!. Under current U.S. accounting standards, financial statements do not report intangible assets and R&D spending is expensed. Nonetheless, the average historical stock returns of firms doing R&D matches the returns of firms without R&D. However, the market is apparently too pessimistic about beaten-down R&D-intensive technology stocks’ prospects. Companies with high R&D to equity market value ~which tend to have poor past returns! earn large excess returns. A similar relation exists between advertising and stock returns. R&D intensity is positively associated with return volatility. THE MARKET VALUE OF A F IRM’S SHARES ultimately ref lects the value of all its net assets. When most of the assets are physical, such as plant and equipment, the link between asset values and stock prices is relatively apparent. In modern economies, however, a large part of a firm’s value may ref lect its intangible assets, such as brand names. Under generally accepted U.S. accounting principles, many types of intangible assets are not reported in firms’ financial statements. When a firm has large amounts of such intangibles, the lack of accounting information generally complicates the task of equity valuation. One type of intangible...
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...[pic] Michael G. Foster School of Business Using a Valuation Model to Estimate a Firm’s Stock Price* In the ongoing search for bargains in the stock market, analysts and investors rely on models to estimate the intrinsic value of a firm’s equity. By comparing the valuation suggested by their model to the actual value in the marketplace, they form opinions as to whether a given stock is under or over valued. Valuation models are also used by investment bankers as an aid to pricing initial public offerings, and to inform parties involved in assorted private transactions such as selling a business or division, dividing property among owners, and settling estates. In this note, we introduce a relatively simple but powerful model of equity (stock) valuation.[1] 1. The basic idea behind valuation Valuation models in finance are typically based on discounted future cash flows or discounted future dividends. Keep in mind that, holding underlying assumptions constant, all valuation models should yield the same result. A model for valuing equity based on accounting data may be preferable in some cases, in that: o Benchmarks for performance are almost always given in earnings per share (EPS) – not cash flows or dividends. o Since real world dividend payout policies tend to be stable for long periods, valuation models based on dividends are less useful for modeling changes in value. o Earnings generally receive far more attention from the business...
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...STOCK VALUATION – Bank of America & JP Morgan Chase The 1997 Asian financial crisis made several economic concepts clear: (1) a nation's financial sector is a critical aspect of its macroeconomic stability; and (2) financial systems are important for maintaining order in the international financial sector. Some experts have stated that the 2014 outlook of the global economy is very positive. However, these same experts also clarified their statements, making it clear that risks are still present. There is a prognosis that there will be volatility in 2014. The implementation of financial market reform policies has been good, but these markets have not yet reached the level where reforms need to be. Therefore, a major reform in the financial sector is now necessary in all parts of the world. Haruhiko Kuroda, Bank of Japan Governor, said that the Japanese economy is doing well; this is due to the fiscal stimulus, monetary easing and structural reforms. He believes that a 2% interest rate is achievable in 2 years. He is optimistic, because the United States (US) economy will grow and Europe is recovering. That is a good sign that economies will grow and accelerate. But he also talked about the fact that there are some possible risks ahead. (Huroda, 2014) Wolfgang Schäuble, Federal Minister of Finance of Germany, stated that the euro is becoming more stable every day. He also said that the Eurozone performed much better than expected. Finally, he said that the...
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