Stock Valuation. Priority in the Division of Cash Flows. Corporate Structure. The Value of a Corporation

Transcription

1 Copoate Stuctue Stock Valuation Most fims in the US ae oganized as limited liability copoations. Thee is no one that owns the fim and who is liable if the fim s actions cause ham. The copoation is a black-box which geneates cash flows. The copoation is defined by: The contacts o ules that goven the distibution of the fims cash flows The contacts o ules that goven its contol ights The Value of a Copoation A copoation s Capital Stuctue is the set of secuities it has issued to aise funds The typical secuities ae Senio debt, Junio debt, Pefeed stock & Common stock. The value of each of these secuities is given by the PV of the shae of the futue cash flows that they will eceive. The value of the copoation is the PV of all futue cash flows geneated by its assets. Which equals the sum of the values of all of its secuities. Fo example the value of fim ABC would be V(ABC) V(Senio Debt) + V(Junio Debt) + V(Pefeed Stock) + V(Common Stock) Pioity in the Division of Cash Flows Senio and Junio Debt ae often coupon bonds Senio debt has the highest pioity: if the fim has to liquidate, the senio debtholdes have the fist claim on the fim s assets. P f d S ki id fi d ifi d di id d Pefeed Stock is paid a fixed, pe-specified dividend. Common stock dividend can only be paid when the debtholdes and pefeed stock holdes have been paid. When fims ean moe pofits than ae necessay to pay the debt and pefeed dividends, then all the esidual goes to the stockholdes (the esidual claimants)

2 The Flow of Funds in a Public Copoation What about contol ights? Copoation ABC s Pojects Cash Flows fom Opeations etained eanings Copoation ABC dividends coupons/ epayments secuities Inv. funds Common Stock Pefeed Stock Junio Debt Senio Debt pioity Common stock holdes (o equity holdes) ae the esidual claimholdes, they also have the esidual contol ights. Majo issues ae decided by equity holdes based on a one-shae one-vote system. Less impotant issues ae decided by the boad of diectos, whose membes ae elected by the common stock holdes. The management, appointed by the boad, is obligated to act in the best inteest of shae holdes. Debt holdes have the contol ight spelled out in the bond covenants (o US Bankuptcy Code) The bond covenants specify that the contol of the fim evets to the bond holdes in the event that the fim does not pay a coupon o pincipal payment on its debt o violates a debt covenant. Stock Pices and Eanings: Histoical Pespective (Shille 005) Calculating fim value: Fim ABC s debt has 0,000 coupon bonds outstanding. These bonds ae cuently tading at a pice of $0,000/bond. In addition, thee ae M shaes of ABC outstanding, cuently tading at a pice of $/shae. What is pesent value of ABC s futue cash flows accoding to the maket? The total Maket Value of ABC s debtis: 0,000 bonds $0,000/bond $00M The total maket value of ABC s stock is: M shaes $/shae $44M The total maket value of ABC and the PV of futue cash flows is: $ 00M + $44M $344M

3 Common Stock Dividends Teminology: The pocess of paying dividends involves fou key dates Announcement Date: when the fim publicly announces the date and the amount of the dividend. Ex-Date: if buy the shae befoe, you will eceive the dividend (the shae is sold cum-dividend). If you buy on o afte, you will not eceive the dividend (the shae is sold ex-dividend). Recod ddate: when the company checks its ecods to see who to send the dividend checks to. Payment Date: when the fim actually pays the dividend (a week o so afte the ecod date). At open on the ex-date the pice falls by (appoximately) the amount of the dividend if it did not, thee would be an abitage oppotunity. Dividends and Capital Gains Today Ex-Date P 0 D, P Calculating the etun on common stock The owne of common stock eans etuns in two ways Pi Pice appeciation i o Capital Gains Dividends Between time 0 and time the total etun on a common stock is: P P + 0 0, 3 Capital Gains Retun D P { 0 Dividend Retun Example: (Geneal Motos) On Januay, 00, GM closed at $48.48 pe shae. On Januay, 003, GM was tading at $37.55 pe shae. Duing that time, GM paid a $ dividend (just pio to Januay, 003). If you had held GM ove this peiod, what would you total etun have been? What pat of you etun was due to the dividend, and what pat to the capital gain? What was GM s dividend yield on Januay, 00. 0, $37.55 $ $ % +4% D $ dividend yield P $ $ 8% 3 $ % Example: Actually, GM paid quately dividends of $0.50 on: () Febuay, 00 (P $50.77) () May 5, 00 (P$66.40) (3) August 4, 00 (P$45.7) (4) Novembe, 00 (P$33.95) All of the above pices ae the fist ex-dividend pice. Calculate the total etun fom holding GM ove this yea if all dividends ae einvested into GM s stock % % Jan, Feb Feb, May May, Aug %

4 Example: Actually, GM paid quately dividends of $0.50 on: () Febuay, 00 (P $50.77) () May 5, 00 (P$66.40) (3) August 4, 00 (P$45.7) (4) Novembe, 00 (P$33.95) Aug, Nov % % Nov, Jan Jan 00, Jan (.06)(.38)(0.70)(0.75)(.) 0.84 Stock Valuation Today Ex-Date P 0 D, P Notation: P 0 is the cuent pice pe shae of the stock today (t0) of fim ABC E(P ) is the expected ex-dividend pice to be in one yea E(D ) is the expected dividend to be paid in one yea * is the etun investos expect to ean on stocks compaable in isk to the stock of fim ABC ove this peiod. Jan 00, Jan % Example: If the expected pice E(P )$50, the expected dividend E(D )$5 and the investos expected etun is *0.0 then the pice must be % $50 P.0 0 What if the pice of ABC wee $49.50? Then you could ean etun % Investos would ush to sell the othe compaable stocks and buy ABC, pushing the pice up to $50 Whee do we get E(P )???? P 0 PV of all futue dividends Today Time Time P 0? E(P )?, E(D )5 E(P )50, E(D )5 We can find out the pice at time by using the pice at time P $50.0 Now that we have the pice at time we can find the cuent pice E(P ) + E(D) + E(D ) E(P ) + E(D ) + * E(D ) E(D) * + * + * E(P ) ( + *) ( + *) $50 4

5 If we continue this foeve Using the pice at Time N, P N. N Di PN + i ( + *) ( + *) i Tki Taking Nto infinity ifiit gives us the fomula, Di i ( + *) i So the cuent pice is the PV of all futue dividends. N The Godon Gowth Model Assumptions: The shae pice is the PV of all futue dividends Dividends ae paid yealy. The next dividend is one yea fom now and is expected to be D Dividends ae expected to gow at ate g foeve. * (the expected etun on compaable fims) will emain constant at whee > g ( is called discount ate, cost of capital and maket capitalization ate). Unde these assumptions the cuent shae pice is the PV of a gowing pepetuity: D g Example: ABC is expected to pay a $5 dividend in one yea. Theeafte dividends ae expected to gow at a ate of 5% pe yea indefinitely. The appopiate discount ate fo ABC is 0%. What should ABC s pice be? What if g 9%? D $5 g D $5 g $00 $500 The Dividend Yield We can eaange the Godon Gowth Model equation to give the expected etun on a stock as a function of the dividend yield and gowth ate. D D g g P D g + P What if g %? D $5 g 0.09 $56 The expected etun on a stock equals the dividend yield plus the dividend gowth ate. 5

6 Example: As of Januay, 003, the expected dividend yields of GM and Micosoft wee 5.33% and 0.9%, espectively. Assuming that investos expected etuns of % on both Micosoft and GM, and assuming a constant dividend gowth ate, what g wee investos expecting fo the two fims? D D g + g P P Micosoft gowth g % GM gowth g % 6