Scribd
Upload
36 views3 pages

Stock and Bond Evaluation

Stock and Bond Evaluation

Uploaded by

ML Creations
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
36 views3 pages

Stock and Bond Evaluation

Stock and Bond Evaluation

Uploaded by

ML Creations
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

AE 113- Financial Markets

Notes on Stock and Bond valuation


Instructor: Clayton M. Langgato
Bond valuation

Future value of a single amount: 𝐹𝑉 = 𝑃𝑉(1 + 𝑟)𝑛


Present value of a single amount: 𝑃𝑉 = 𝐹𝑉(1 + 𝑟)−𝑛
1−(1+𝑟)−𝑛
Annuity: 𝑃𝑉𝐴 = 𝐴 𝑥 [ ]
𝑟

Annuity- An annuity is a series of equal payments or receipts that occur at fixed intervals over a
specified period of time.

Example:
U-tube company issued a 3-year bond with a P1,000.00 face value and a 5% coupon rate, with
coupons paid once a year at the end of every year. It is now the beginning of the second year
and the first coupon has already been paid. The required rate of return is 4% and the Bond’s
Market Value is P913.00.

1. What is the bond’s coupon payment? P50.00


2. What is the bond’s current yield? 5.48%
3. What is the bond’s Yield (yield to maturity)? use this to compute market value
4. What is the bond’s fair value? P1,018.86

Formula:
1. Coupon payment= face value x coupon rate
2. Current yield= annual coupon payment/ current market price

(𝐹−𝑃)
𝐶+ 𝑛
3. 𝑌𝑇𝑀 = (𝐹+𝑃)
2

(𝐹−𝑃)
𝐶+ 𝑛
3.1 *𝑌𝑇𝐶 =
𝑦𝑡𝑐
(𝐹+𝑃)
2
Where:
YTM = Yield to Maturity *YTC= Yield to call
C = Annual coupon payment *nytc = Number of years to call date
F = Face value of the bond
P = Current price of the bond
n = Number of years to maturity
4. Present value of all future cash flows using the *required rate of return
𝐶𝐹1 𝐶𝐹2 𝐶𝐹3 𝐶𝐹𝑛
𝑉0 = 1 + 2 + 3 + ⋯+
(1 + 𝑅) (1 + 𝑅) (1 + 𝑅) (1 + 𝑅)𝑛
Stock Valuation
Future value of a single amount: 𝐹𝑉 = 𝑃𝑉(1 + 𝑟)𝑛
Present value of a single amount: 𝑃𝑉 = 𝐹𝑉(1 + 𝑟)−𝑛
1−(1+𝑟)−𝑛
Annuity: 𝑃𝑉𝐴 = 𝐴 𝑥 [ ]
𝑟
Perpetuity: PV = C / r
Perpetuity with growth rate: PV = C / (r - g)

Perpetuity- A perpetuity refers to an investment that provides a fixed, constant cash flow forever

1. Absolute- Absolute valuation attempts to determine a company's intrinsic value based on


its estimated future cash flows, without comparing it to other companies.
a. Discounted Cash Flow Model (DCF)
i. Estimates future free cash flows
ii. Discounts them to present value using a required rate of return
iii. Sums up discounted cash flows to arrive at the company's intrinsic value
iv. Compares intrinsic value to current market price to determine if stock is
over/undervalued
b. Dividend Discount Model (DDM)
i. Similar to DCF, but focuses on future dividend payments instead of cash flows
ii. Useful for stable, dividend-paying companies
2. Relative- Relative valuation compares a company's value to that of its peers or the overall
market using standardized measures like financial ratios.

General Dividend Valuation Model


- Infinite number of dividend payments
𝐷1 𝐷2 𝐷3 𝐷∞
𝑃0 = 1 + 2 + 3 + ⋯+
(1 + 𝑅) (1 + 𝑅) (1 + 𝑅) (1 + 𝑅)∞
Assumptions on estimating dividends:
1. Zero growth
- Firm will pay constant dividend forever
- Price is computed using the perpetuity formula
- Appropriate for a preferred stock
𝐷
- Formula: 𝑃0 =
𝑅
- Where:
o P0 = stock price,
o D= dividend, and
o R=Required rate of return per period
Examples:
a. The current stock price of U-tub, Inc., is P44.72. If the required rate of return is 19%, what is the
dividend paid by this firm, which is not expected to grow in the near future. -> P8.50
b. Suppose a stock is expected to pay a P0.50 dividends every quarter and the required return is
10% with quarterly compounding. What is the price? -> P20.00
c. U-tube Corp. pays a constant P8.00 dividends on its stock. The company will maintain this
dividend for the next 5 years and will then cease paying dividends forever. If the required return
on this stock is 12 percent, what is the current share price? -> P28.84

2. Constant Dividend Growth


- The firm will increase the dividend by a constant percent every period
- It is an appropriate assumption for mature companies with history of stable growth
𝑫
- 𝑃0 = 𝟏
𝑅−𝑔
Example:
a. U-tube Corp. has been growing at a rate of 6% for the past two years, and the company’s CEO
expects the company to continue to grow at this rate for the next several years. The company
paid a dividend of P1.20 last year. If your required rate of return was 14%, what is the maximum
price that you would be willing to pay for this company’s stock?-> P15.90
b. Managers at U-tube Inc. have decided to decrease the firm’s annual dividend due to
decreasing market share. The last annual dividend was P1.75 but all future dividends will decrease
by 17%annually. What is a share of this stock worth today at a required rate return of 22 %? ->
P3.72

3. Variable Growth Model


- It encompasses any model where the growth rate changes over time
Example:
a. The most recent annual dividend of U-tube, Inc. was P1.50 per share. Ther firms financial
manager expects that these dividends will increase at a 10% annual rate over the next three
years. At the end of three years, the firm’s mature product line is expected to result in a slowing of
the dividend growth rate to 5% per year for the foreseeable future. The firm’s required return is
15%. What is the value of the stock today? ->P21.00
3.1. Nonconstant or supernormal growth
o It assumes that a company will experience a period of high growth (above normal)
for a finite period, after which the growth rate will stabilize at a lower, sustainable
level

4. Free cash flow valuation model


- It's based on the principle that a company's value is determined by its ability to generate
cash for its shareholders.
- FCF valuation estimates a company's value based on its expected future free cash flows,
discounted to their present value.
- FCF is the cash a company generates after accounting for cash outflows to support
operations and maintain its capital assets.
- FCF = Operating Cash Flow - Capital Expenditures
𝐹𝐶𝐹 𝐹𝐶𝐹 𝐹𝐶𝐹 𝐹𝐶𝐹
- 𝑉𝐶 = (1+𝑅)1 1 + (1+𝑅)2 2 + (1+𝑅)3 3 + ⋯ + (1+𝑅)∞∞
- 𝑉𝐶𝑆 = 𝑉𝐶 − 𝑉𝐷 − 𝑉𝑃
Example:
Year FCF Other data
2018 P400,000.00 Growth rate of FCF beyond 2024 to infinity
2019 P450,000.00 WACC = 9%
2020 P520,000.00 Market Value of Debt = P3,100,000.00
2023 P560,000.00 Market Value of Preferred shares = P800,000.00
2024 P600,000.00 # of common shares outstanding = 300,000

What is the value of the company? Vc= P8,628,234


Calculate the value of the common stocks. Vcs= P4,728,234
How much is the price per share of the common stocks? Po=P15.76

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy