THEORY OF FINANCE CHAPTER 7 STOCKS AND STOCK MARKETS ...
THEORY OF FINANCE CHAPTER 7 STOCKS AND STOCK MARKETS •
Large firms sell or issue shares of stock to the public when they need to raise money, and as the name suggest, shareholders share the ownership of the firm in proportion to the number of shares they hold
•
Sales of new shares by the firm are said to occur in the primary market o
2 types of primary market issues:
IPO - initial public offering •
Seasoned equity offerings •
o
Selling shares for the first time
Selling more shares
P0=Dividend/vield
•
Exchanges are really markets for secondhand stocks, or secondary markets
•
Ratio of price per share to earnings per share - price earnings multiple
•
Book value: records all the money the company has raised from its shareholders plus all the earnings that have been plowed back into the firm
•
Stock price equals liquidation value per share - amount of cash per share a company could raise if its sold all its assets
•
Difference between a company's actual value and its book or liquidation value is oftern referred to as a going concern value
•
o
Extra earning power: a company may have the ability to earn more than an adequate rate of return on assets
o
Intangible assets: accounting rules don't permit firms to put all assets on the balance sheet or statement of financial position
o
Value of future investments: if investors believe a company will have to opportunity to make exceedingly profitable investments in the future
Market value balance sheet: o
Assets: ssets in place, investment opportunities
o
Liabilities and shareholders equity: market value of debt and other obligations, market value of shareholders equity
•
Price = DIV/r-g
•
Return on equity = g/plowback ratio
•
V o= o
DIV1+ P1 1+ R Vo = intrinsic value of the share
•
•
• •
Dividend Discount Model:
o
o
• •
Constant Growth Dividend Discount Model o
Requires a forecast of dividends for every year into the future
o
o
o
o
o o
o o
o
Constant growth dividend discount mode
o o
Earnings per share = closing price/PE
o
Net income = EPS x shares
o
Required return = D/P
Large firms sell or issue shares of stock to the public when they need to raise money, and as the name suggest, shareholders share the ownership of the firm in proportion to the number of shares they hold
•
Sales of new shares by the firm are said to occur in the primary market o
2 types of primary market issues:
IPO - initial public offering •
Seasoned equity offerings •
o
Selling shares for the first time
Selling more shares
P0=Dividend/vield
•
Exchanges are really markets for secondhand stocks, or secondary markets
•
Ratio of price per share to earnings per share - price earnings multiple
•
Book value: records all the money the company has raised from its shareholders plus all the earnings that have been plowed back into the firm
•
Stock price equals liquidation value per share - amount of cash per share a company could raise if its sold all its assets
•
Difference between a company's actual value and its book or liquidation value is oftern referred to as a going concern value
•
o
Extra earning power: a company may have the ability to earn more than an adequate rate of return on assets
o
Intangible assets: accounting rules don't permit firms to put all assets on the balance sheet or statement of financial position
o
Value of future investments: if investors believe a company will have to opportunity to make exceedingly profitable investments in the future
Market value balance sheet: o
Assets: ssets in place, investment opportunities
o
Liabilities and shareholders equity: market value of debt and other obligations, market value of shareholders equity
•
Price = DIV/r-g
•
Return on equity = g/plowback ratio
•
V o= o
DIV1+ P1 1+ R Vo = intrinsic value of the share
•
•
• •
Dividend Discount Model:
o
o
• •
Constant Growth Dividend Discount Model o
Requires a forecast of dividends for every year into the future
o
o
o
o
o o
o o
o
Constant growth dividend discount mode
o o
Earnings per share = closing price/PE
o
Net income = EPS x shares
o
Required return = D/P
