韩山师范学院财务管理课件第十章 Valuation and Rates of Return.ppt

Chapter 10 Valuation and Ratesof Return Chapter 10 - Outline LT 10-1 Valuation of Bonds 3 Factors that Influence the Required Rate of Return Relationship Between Bond Prices and Yields Preferred Stock Valuation of Common Stock Valuation Using the Price-Earnings Ratio Valuation of Bonds LT 10-2 The value of a bond is made up of 2 parts added together: – PV of the interest payments (an annuity) – PV of the principal payment (a lump sum) The principal payment at maturity: – can also be called the par value or face value – is usually $1,000 The interest rate used: – is the yield to maturity or discount rate – is also the required rate of return 3 Factors that Influence the Required Rate of Return LT 10-3 Real Rate of Return: – represents the opportunity cost of the investment Inflation Premium: – a premium to compensate for the effects of inflation Risk Premium: – a premium associated with business and financial risk So , the Required Rate of Return equals: – Real Rate of Return + Inflation Premium + Risk Premium Relationship Between Bond Prices and Yields LT 10-4 Bond prices are inversely related to bond yields (move in opposite directions) As interest rates in the economy change, the price or value of a bond changes: – if the required rate of return increases, the price of the bond will decrease – if the required rate of return decreases, the price of the bond will increase Preferred Stock LT 10-5 Preferred stock: – usually represents a perpetuity (something with no maturity date) – has a fixed dividend payment – is valued without any principal payment since it has no ending life – is considered a hybrid security (a mixture of a stock and a bond) – owners have a higher priority than common stockholders Valuation of Common Stock LT 10-6 The value of common stock is the present value of a stream of future dividends Common stock dividends can vary, unlike preferred stock dividends There are 3 possible cases: – No grow