FINC341: ch. 9- stock valuation

March 10, 2000

"irrational exuberance," tell them to bring down stock investment (and tech bubble burst!) NASDAQ @ 5232 brought down to 1200 9/11 drove further down

block takeovers

- elect only 1/3 of directors each year - require 75% rather than 50% of stockholders to approve merger - vote in poison pill provision- allows stockholders to buy takeover firm's shares at reduced price - stockholders do not want barriers to protect incompetent managers; SEC ruled in 1993 that large investors may work together now to affect management decisions

1999 market

.com boom / tech bubble

two required conditions for the constant growth model

1. required rate of return must be greater than the long run growth rate (cannot be negative in denominator) 2. not appropriate unless a company's growth rate is expected to be remain constant in the future

publicly owned corporations

A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.

But when growth is constant...

CGY = g

Capital Gains Yield

CGY1 = (P1-P0)/P0 (New-old) / old OR find doing: Total yield - Dividend Yield = CGY

preemptive right

Common stockholders often have the right, called the preemptive right, to purchase on a pro rata basis any additional shares sold by the firm. 1. prevents the management of a corporation from issuing a large number of additional shares and purchasing those shares itself 2. The second and far more important reason for the preemptive right is to protect stockholders from a dilution of value.

dividend yield

DY1 = D1 / P0 Dividend at T=1 divided by price at T=0

going public

Going public refers to a private company's initial public offering (IPO), thus becoming a publicly-traded and owned entity.

proxy fight

However, if performance is poor and stockholders are dissatisfied, an outside group may solicit the proxies in an effort to overthrow management and take control of the business. This is known as a proxy fight.

Initial Public Offering (IPO)

The first public offering of a corporation's stock.

classified stock

The use of classified stock enables the company's founders to maintain control over the company without having to own a majority of the common stock.

discounted dividend model

Value of a stock is the present value of the future dividends expected to be generated by the stock.

Using NPV for her stock valuation problems, the CF at placement position is always

ZERO. the discount rate will be the required return!

PREFERRED STOCK HAS A GROWTH OF

ZEROOOO PERCENT! it is a perpetuity. infinite life!

closely held corporations

a corporation that is owned by a few individuals who are typically associated with the firm's management

early 2000

abby joseph cohen (goldman sachs) all computer stocks-> 40 P/E ratio

Takeover

another corporation may attempt to take the firm over by purchasing a majority of the outstanding stock.

cannot have both high dividends and high growth of the company

because high dividends hinders high retaining of earnings, and high growth is the product of retaining earnings.

Total yield

dividend yield + capital gains yield

who is bob pisani?

https://www.cnbc.com/2020/09/18/stock-picking-has-a-terrible-track-record-and-its-getting-worse.html - writer at CNBC - After that, if the strategy is successful, everyone copies you and it gets progressively more difficult to get outperformance. - evidence that size (small cap tends to outperform large cap) and momentum are also useful strategies. By momentum, I mean the average return of the top 30% of stocks versus the bottom 30% of stocks. - Yes. All risk assets go through long periods of underperformance. If that were not true then there would be no risk for long-term investors. Most investors would be shocked to learn that the S&P 500 has underperformed riskless one-month Treasurys for three periods of at least 13 years (1929-1943, 1966-1982, and 2000-2012). This means long-term investors must be disciplined. Diversification is your friend protecting you from having all your eggs in the wrong basket. - The main issue is that Wall Street is engaged in a propaganda war. Wall Street wants you to believe active management works so you'll pay them the high fees. It is not in the business interest of the financial advice industry to recommend passive strategies. The financial press goes along with this because promoting the latest stock predictions from Wall Street gurus makes for a good story. It doesn't help that most investors have very little financial education and don't understand anything about investing, so it's easy to prey on their ignorance. - For starters, write an investment plan that is based on your unique ability and ability to take risk. I discuss how to do this in my other book, "Your Complete Guide to a Successful and Secure Retirement." And then write that plan down, sign it, and stay the course, only rebalancing along the way. And ignore the noise of the market. - You could do it with as few as three investments. You need a broad U.S. stock fund. You need a broad international fund. And you need to own bonds. For taxable accounts I recommend owning certificates of deposit. With CDs you get better returns than Treasurys with a lot less risk than owning bond funds. And there is no cost!

who is art cashin?

https://www.xavierhsalumni.org/s/81/21/interior.aspx?pgid=603 - assistant clerk at Thomson and McKinnon - one of the youngest men to hold a seat on the NYSE - in 2000, PaineWebber merged into UBS - writes a morning outlook, featured on CNBC and MSNBC - charitable activities at NYSE - NYSE: Governor, member of several committees: market performance, market regulation and review, review the constitution. -

why is preferred stock called a hybrid?

it is like a bond- set payment, "fixed income" it is also like a stock- infinite life (value with gordon model), g=0% so infinite perpetuity "fixed income"- preferred stock and bonds

primary market

market for selling financial assets that can only be redeemed by the original holder

founders' shares

stock owned by the firm's founders that enables them to maintain control over the company without having to own a majority of stock

when using GM, the numerator is

the first in its series!

secondary market

the market in which previously issued securities are traded among investors

how can an equity analyst use EVA (along with regression analysis) or the gordon model (if the company pays dividends) to calculate the fundamental value of the stock today?

use future free cash flows, first term in brackets represents amount of cash generated from existing stores, second term represents cash the company plans to spend this period. Capital expenditures lead to a corresponding increase in firm's fixed assets. Gordon model uses the idea of infinite, constant growth to value stocks- at price at time zero- using the next dividend divided by the difference of the required return and growth.