1 IIS Chapter 8 - Stock Valuation Chapter 7 - Valuation and Characteristics of Bonds.

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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



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



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 = 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



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



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


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.


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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.


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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

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1 IIS Chapter 8 - Stock Valuation Chapter 7 - Valuation and Characteristics of Bonds.

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Transcript of 1 IIS Chapter 8 - Stock Valuation Chapter 7 - Valuation and Characteristics of Bonds.