1 iis chapter 8 - stock valuation chapter 7 - valuation and characteristics of bonds
TRANSCRIPT
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Chapter 8 - Stock Valuation
Chapter 7 - Valuation and Characteristics of Bonds
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Tujuan Pembelajaran 1
Mahasiswa mampu untuk:Membedakan berbagai jenis obligasi dan menjelaskan beberapa karakteristik obligasi yang populer
Menjelaskan definisi nilai untuk berbagai penggunaan
Menjelaskan faktor-faktor yang menentukan nilai
Menjelaskan proses dasar penilaian aset
Menghitung nilai obligasi dan yield to maturity
Menjelaskan lima hubungan penting pada penilaian obligasi
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Pokok Bahasan 1
Jenis-jenis obligasi
Terminologi dan karakterisitik obligasi
Definisi nilai
Penentu nilai
Proses dasar penilaian
Penilaian obligasi
Yield to maturity
Lima hubungan penting pada penilaian obligasi
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Tujuan Pembelajaran 2
Mahasiswa mampu untuk: Menguraikan karakterisitik dan ciri saham preferen
Menghitung nilai saham preferen
Menjelaskan karakteristik dan ciri saham biasa
Menghitung nilai saham biasa
Menghitung tingkat imbal hasil yang diharapkan dari saham
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Pokok Bahasan 2
Jenis dan ciri saham preferen
Me nilai saham preferen
Karakteristik saham biasa
Menilai saham biasa
Menghitung tingkat imbal hasil yang diharapkan pemegang saham
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Characteristics of Bonds
· Bonds pay fixed coupon (interest) payments at fixed intervals (usually every six months) and pay the par value at maturity.
0 1 2 . . . n
$I $I $I $I $I $I+$M
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Example: AT&T 6 ½ 32
Par value = $1,000
Coupon = 6.5% or par value per year,
or $65 per year ($32.50 every six months).
Maturity = 28 years (matures in 2032).
Issued by AT&T.
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Example: AT&T 6 ½ 32
Par value = $1,000
Coupon = 6.5% or par value per year,
or $65 per year ($32.50 every six months).
Maturity = 28 years (matures in 2032).
Issued by AT&T.
0 1 2 … 28
$32.50 $32.50 $32.50 $32.50 $32.50 $32.50+$1000
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Types of Bonds
Debentures - unsecured bonds.
Subordinated debentures - unsecured “junior” debt.
Mortgage bonds - secured bonds.
Zeros - bonds that pay only par value at maturity; no coupons.
Junk bonds - speculative or below-investment grade bonds; rated BB and below. High-yield bonds.
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Types of Bonds
Eurobonds - bonds denominated in one currency and sold in another country. (Borrowing overseas.)
example - suppose Disney decides to sell $1,000 bonds in France. These are U.S. denominated bonds trading in a foreign country. Why do this?
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Types of Bonds
Eurobonds - bonds denominated in one currency and sold in another country. (Borrowing overseas).example - suppose Disney decides to sell $1,000 bonds in France. These are U.S. denominated bonds trading in a foreign country. Why do this?
If borrowing rates are lower in France.To avoid SEC regulations.
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The Bond Indenture
The bond contract between the firm and the trustee representing the bondholders.
Lists all of the bond’s features:
coupon, par value, maturity, etc.
Lists restrictive provisions which are designed to protect bondholders.
Describes repayment provisions.
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Value
Book value: value of an asset as shown on a firm’s balance sheet; historical cost.
Liquidation value: amount that could be received if an asset were sold individually.
Market value: observed value of an asset in the marketplace; determined by supply and demand.
Intrinsic value: economic or fair value of an asset; the present value of the asset’s expected future cash flows.
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Security Valuation
In general, the intrinsic value of an asset = the present value of the stream of expected cash flows discounted at an appropriate required rate of return.
Can the intrinsic value of an asset differ from its market value?
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Valuation
Ct = cash flow to be received at time t.
k = the investor’s required rate of return.
V = the intrinsic value of the asset.
V = t = 1
n
S $Ct
(1 + k)t
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Bond Valuation
Discount the bond’s cash flows at the investor’s required rate of return.
The coupon payment stream (an annuity).
The par value payment (a single sum).
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Bond Valuation
Vb = $It (PVIFA kb, n) + $M (PVIF kb, n)
$It $M
(1 + kb)t (1 + kb)nVb = +
n
t = 1S
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Bond Example
Suppose our firm decides to issue 20-year bonds with a par value of $1,000 and annual coupon payments. The return on other corporate bonds of similar risk is currently 12%, so we decide to offer a 12% coupon interest rate.
What would be a fair price for these
bonds?
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0 1 2 3 . . . 20
1000 120 120 120 . . . 120
Note: If the coupon rate = discount rate, the bond will sell for par value.
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Bond Example
Mathematical Solution:
PV = PMT (PVIFA k, n ) + FV (PVIF k, n )
PV = 120 (PVIFA .12, 20 ) + 1000 (PVIF .12, 20 )
1
PV = PMT 1 - (1 + i)n + FV / (1 + i)n
i
1
PV = 120 1 - (1.12 )20 + 1000/ (1.12) 20 = $1000
.12
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Suppose interest rates fall immediately after we issue the bonds. The required return on bonds of similar risk drops to 10%.
What would happen to the bond’s intrinsic value?
Note: If the coupon rate > discount rate, the bond will sell for a premium.
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Bond Example
Mathematical Solution:
PV = PMT (PVIFA k, n ) + FV (PVIF k, n )
PV = 120 (PVIFA .10, 20 ) + 1000 (PVIF .10, 20 )
1
PV = PMT 1 - (1 + i)n + FV / (1 + i)n
i
1
PV = 120 1 - (1.10 )20 + 1000/ (1.10) 20 = $1,170.27
.10
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Suppose interest rates rise immediately after we issue the bonds. The required return on bonds of similar risk rises to 14%.
What would happen to the bond’s intrinsic value?
Note: If the coupon rate < discount rate, the bond will sell for a discount.
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Bond Example
Mathematical Solution:
PV = PMT (PVIFA k, n ) + FV (PVIF k, n )
PV = 120 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 )
1
PV = PMT 1 - (1 + i)n + FV / (1 + i)n
i
1
PV = 120 1 - (1.14 )20 + 1000/ (1.14) 20 = $867.54
.14
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Suppose coupons are semi-annualMathematical Solution:
PV = PMT (PVIFA k, n ) + FV (PVIF k, n )
PV = 60 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 )
1
PV = PMT 1 - (1 + i)n + FV / (1 + i)n
i
1
PV = 60 1 - (1.07 )40 + 1000 / (1.07) 40 = $866.68
.07
Mathematical Solution:
PV = PMT (PVIFA k, n ) + FV (PVIF k, n )
PV = 60 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 )
1
PV = PMT 1 - (1 + i)n + FV / (1 + i)n
i
1
PV = 60 1 - (1.07 )40 + 1000 / (1.07) 40 = $866.68
.07
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Yield To Maturity
The expected rate of return on a bond.
The rate of return investors earn on a bond if they hold it to maturity.
$It $M
(1 + kb)t (1 + kb)n
P0 = +n
t = 1S
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YTM Example
Suppose we paid $898.90 for a $1,000 par 10% coupon bond with 8 years to maturity and semi-annual coupon payments.
What is our yield to maturity?
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Bond Example
Mathematical Solution:
PV = PMT (PVIFA k, n ) + FV (PVIF k, n )
898.90 = 50 (PVIFA k, 16 ) + 1000 (PVIF k, 16 )
1
PV = PMT 1 - (1 + i)n + FV / (1 + i)n
i
1
898.90 = 50 1 - (1 + i )16 + 1000 / (1 + i) 16
i solve using trial and error
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Zero Coupon Bonds
No coupon interest payments.
The bond holder’s return is determined entirely by the price discount.
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Zero Example
Suppose you pay $508 for a zero coupon bond that has 10 years left to maturity.
What is your yield to maturity?
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Zero Example
Suppose you pay $508 for a zero coupon bond that has 10 years left to maturity.
What is your yield to maturity?
0 10
-$508 $1000
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Zero Example
Mathematical Solution:
PV = FV (PVIF i, n )
508 = 1000 (PVIF i, 10 )
.508 = (PVIF i, 10 ) [use PVIF table]
PV = FV /(1 + i) 10
508 = 1000 /(1 + i)10
1.9685 = (1 + i)10
i = 7%
0 10
PV = -508 FV = 1000
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The Financial Pages: Corporate Bonds
Cur Net
Yld Vol Close Chg
Polaroid 11 1/2 06 19.3 395 59 3/4 ...
What is the yield to maturity for this bond?
P/YR = 2, N = 10, FV = 1000,
PV = $-597.50,
PMT = 57.50
Solve: I/YR = 26.48%
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The Financial Pages: Corporate Bonds
Cur Net
Yld Vol Close Chg
HewlPkd zr 17 ... 20 51 1/2 +1
What is the yield to maturity for this bond?
P/YR = 1, N = 16, FV = 1000,
PV = $-515,
PMT = 0
Solve: I/YR = 4.24%
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The Financial Pages: Treasury Bonds
Maturity Ask
Rate Mo/Yr Bid Asked Chg Yld
9 Nov 18 139:14 139:20 -34 5.46
What is the yield to maturity for this
Treasury bond? (assume 35 half years)
P/YR = 2, N = 35, FV = 1000,
PMT = 45,
PV = - 1,396.25 (139.625% of par)
Solve: I/YR = 5.457%
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Preferred Stock
A hybrid security:
It’s like common stock - no fixed maturity.Technically, it’s part of equity capital.
It’s like debt - preferred dividends are
fixed.Missing a preferred dividend does not constitute default, but preferred dividends are cumulative.
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Usually sold for $25, $50, or $100 per share.
Dividends are fixed either as a dollar amount or as a percentage of par value.
Example: In 1988, Xerox issued $75 million of 8.25% preferred stock at $50 per share.
$4.125 is the fixed, annual dividend per share.
Preferred Stock
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Firms may have multiple classes of preferreds, each with different features.
Priority: lower than debt, higher than common stock.
Cumulative feature: all past unpaid preferred stock dividends must be paid before any common stock dividends are declared.
Preferred Stock Features
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Protective provisions are common.
Convertibility: many preferreds are convertible into common shares.
Adjustable rate preferreds have dividends tied to interest rates.
Participation: some (very few) preferreds have dividends tied to the firm’s earnings.
Preferred Stock Features
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PIK Preferred: Pay-in-kind preferred stocks pay additional preferred shares to investors rather than cash dividends.
Retirement: Most preferreds are callable, and many include a sinking fund provision to set cash aside for the purpose of retiring preferred shares.
Preferred Stock Features
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Preferred Stock Valuation
A preferred stock can usually be valued like a perpetuity:
V =Dk
psps
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Example:
Xerox preferred pays an 8.25% dividend on a $50 par value.
Suppose our required rate of return on Xerox preferred is 9.5%.
Vps =4.125
.095= $43.42
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Expected Rate of Return on Preferred
Just adjust the valuation model:
D
Po
kps =
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Example
If we know the preferred stock price is $40, and the preferred dividend is $4.125, the expected return is:
D
Po
kps = = = .10314.125
40
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The Financial Pages:Preferred Stocks
52 weeks Yld Vol
Hi Lo Sym Div % PE 100s Close
2788 2506 GenMotor pfG 2.28 8.9 … 86 25 53
Dividend: $2.28 on $25 par value
= 9.12% dividend rate.
Expected return: 2.28 / 25.53 = 8.9%.
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Common Stock
Is a variable-income security.Dividends may be increased or decreased, depending on earnings.
Represents equity or ownership.
Includes voting rights.
Limited liability: liability is limited to amount of owners’ investment.
Priority: lower than debt and preferred.
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Common Stock Characteristics
Claim on Income - a stockholder has a claim on the firm’s residual income.
Claim on Assets - a stockholder has a residual claim on the firm’s assets in case of liquidation.
Preemptive Rights - stockholders may share proportionally in any new stock issues.
Voting Rights - right to vote for the firm’s board of directors.
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You expect XYZ stock to pay a $5.50 dividend at the end of the year. The stock price is expected to be $120 at that time.
If you require a 15% rate of return, what would you pay for the stock now?
Common Stock Valuation(Single Holding Period)
0 1
? 5.50 + 120
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Common Stock Valuation(Single Holding Period)
Solution:
Vcs = (5.50/1.15) + (120/1.15)
= 4.783 + 104.348
= $109.13
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The Financial Pages:Common Stocks
52 weeks Yld Vol Net
Hi Lo Sym Div % PE 100s Hi Lo Close Chg
135 80 IBM .52 .5 21 142349 99 93 9496 -343
82 18 CiscoSys … 47 1189057 21 19 2025 -113
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Common Stock Valuation(Multiple Holding Periods)
Constant Growth ModelAssumes common stock dividends will grow at a constant rate into the future.
Vcs =D1
kcs - g
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Constant Growth ModelAssumes common stock dividends will grow at a constant rate into the future.
D1 = the dividend at the end of period 1.kcs = the required return on the common stock.g = the constant, annual dividend growth rate.
Vcs =D1
kcs - g
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Example
XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15%?
D0 = $5, so D1 = 5 (1.10) = $5.50
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Example
XYZ stock recently paid a $5.00 dividend. The dividend is expected to grow at 10% per year indefinitely. What would we be willing to pay if our required return on XYZ stock is 15%?
Vcs = = = $110 D1 5.50
kcs - g .15 - .10
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Expected Return on Common Stock
Just adjust the valuation model
Vcs =D
kcs - g
k = ( ) + gD1
Po
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ExampleWe know a stock will pay a $3.00 dividend at time 1, has a price of $27 and an expected growth rate of 5%.
kcs = ( ) + gD1
Po
kcs = ( ) + .05 = 16.11%3.00
27