《L5_stock_valuation》.pdf

Corporate Finance Lecture 5: Stock Valuation Dr. Zhang March 2010 What we learned last time  Bond valuation  Bond prices = PV of coupon payments + PV of principals  Coupon rate v.s. discount rate  Yield to maturity v.s. holding period yield  Excel operations for calculating YTM and bond prices.  Comparing two payment methods: Equal payments v.s. equal principals. 2010-3-22 2 Today’s Lecture:  I. Stock Valuation: (Chapter 5)  A. Deriving the PV formula for stock prices.  B. Stock valuation for different types of stocks.  C. Growth opportunities  D. P/E ratios 2010-3-22 3 A. PV formula  Same idea: the price of any asset is determined by the present value of the future cash flows that the asset brings to its holder.  Notation: P, D and E are values per share.  Stock usually pay dividends (股息) on a regular basis.  Suppose an investor plans to hold the stock for one year and sells the stock as soon as she receives the first dividend D . 1 2010-3-22 4  She would receive a selling price of P1  Applying the above equation for T-1 times,  and plugging them into the above equation, we have  Taking T to infinity , we have 2010-3-22 5 Fundamental values Bubbles  The above equation says the price of stock consists of two parts: the fundamental values (the left term) and the bubbles (the right term). T  Assuming lim P /(1+r) =0 (in other wor