Valuation and Rates of Return - McGraw
Transcription
Valuation and Rates of Return - McGraw
CHAPTER TEN Valuation and Rates of Return McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 Foundations of Financial PPT 10-1 Management th CANADIAN EDI TI ON Figure 10-1 / The relationship between time value of money, required return, cost of financing, and investment decisions Chapter 10 Required rates of return by investors Chapter 9 Present value concepts Chapter 11 Chapters 12 and 13 Cost of financing to the firm Analysis of projects based on cost of financing to the firm Valuation Block Hirt Short McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 Foundations of Financial PPT 10-2 Management th CANADIAN EDI TI ON Table 10-1 Bond price table (10 Percent Interest Payment, 20 Years to Maturity) Yield to Maturity Bond Price 2% . . . . . . . . . . . . $2,308.11 4 . . . . . . . . . . . . 1,815.42 6 . . . . . . . . . . . . 1,458.80 Block Hirt Short McGraw-Hill Ryerson 7 8 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,317.82 1,196.36 1,091.29 10 11 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000.00 920.37 850.61 13 14 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789.26 735.07 644.27 20 25 . . . . . . . . . . . . . . . . . . . . . . . . 513.04 406.92 ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 Foundations of Financial PPT 10-3 Management th CANADIAN EDI TI ON Table 10-2 Impact of time to maturity on bond prices Time Period in Years (of 10 percent bond) Bond Price with 8 Percent Yield to Maturity Bond Price with 12 Percent Yield to Maturity 0 1 5 . . . . . . . . . . . . . . . . . . . . . . . . $1,000.00 1,018.52 1,079.85 $1,000.00 982.14 927.90 10 15 20 . . . . . . . . . . . . . . . . . . . . . . . . 1,134.20 1,171.19 1,196.36 887.00 863.78 850.61 25 30 . . . . . . . . . . . . . . . . 1,213.50 1,225.16 843.14 838.90 Block Hirt Short McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 Foundations of Financial PPT 10-4 Management th CANADIAN EDI TI ON Figure 10-2 Relationship between time to maturity and bond price* Bond Price ($) Assumes 8% yield to maturity 1,300 1,200 1,100 10% bond, $1,000 par value 1,000 900 800 Assumes 12% yield to maturity 700 30 Block Hirt Short 25 15 5 Number of years to maturity 0 * The relationship in the graph is not symmetrical in nature. McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 Block Hirt Short th CANADIAN Foundations of Financial Management PPT 10-5 EDI TI ON Table 10-3 An example of stock quotations from the Globe and Mail Source: ILX Systems, a division of Thomson Information Services Inc. McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 th CANADIAN Foundations of Financial Management PPT 10-6 EDI TI ON Stock valuation under supernormal growth analysis Block Hirt Short McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 th CANADIAN Foundations of Financial Management EDI TI ON Chapter 10 - Outline LT 10-1 • Valuation Concepts • 3 Factors that Influence the Required Rate of Return • Valuation of Bonds • Relationship Between Bond Prices and Yields • Preferred Stock • Valuation of Common Stock • Valuation Using the Price-Earnings Ratio Block Hirt Short McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 th CANADIAN Foundations of Financial Management EDI TI ON Valuation concepts LT 10-2 • Value or price of a stock or bond is based upon the present value of future cash flows to the investor • Discount rate used is investors’ required rate of return, based on the market’s estimates of risk, efficiency, and expected future returns Block Hirt Short McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 Block Hirt Short th CANADIAN Foundations of Financial Management EDI TI ON 3 Factors that Influence the Required Rate of Return LT 10-3 Real Rate of Return: – represents the opportunity cost of the investment – in the early 1990’s, 5-7%, but now about 3-4% Inflation Premium: – a premium to compensate for the effects of inflation – lately, 2% Risk Premium: – a premium associated with business and financial risk – typically, 2-6% So, the Required Rate of Return equals: – Real Rate of Return + Inflation Premium + Risk Premium McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 th CANADIAN Foundations of Financial Management EDI TI ON Valuation of Bonds LT 10-4 The value of a bond is made up of 2 parts: – 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 Block Hirt Short The interest rate used: – is the yield to maturity or discount rate – is also the required rate of return McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 th CANADIAN Foundations of Financial Management EDI TI ON Relationship Between Bond Prices and Yields LT 10-5 • 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 Block Hirt Short McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 th CANADIAN Foundations of Financial Management EDI TI ON Valuation of Preferred Stock LT 10-6 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 – owners have a higher priority than common shareholders – price is based upon PV of future dividends Block Hirt Short McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 th CANADIAN Foundations of Financial Management EDI TI ON Valuation of Common Stock LT 10-7 • 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 growth in dividends (valued like preferred stock) – Constant growth in dividends – Variable growth in dividends • Required rate of return reflects the dividend yield on the stock and the expected growth rate in the dividend Block Hirt Short McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 th CANADIAN Foundations of Financial Management EDI TI ON Valuation Using the Price-Earnings Ratio LT 10-8 • The Price-Earnings (P/E) ratio can also be used to value common stocks • The P/E ratio is influenced by many factors: – the earnings and sales growth of the firm – the risk (or volatility in performance) – the debt-equity structure – the dividend policy – the quality of management Block Hirt Short • Average P/E ratio for TSE 300 in early 1999 was 27 to 1 McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000 FIF T H 5 th CANADIAN Foundations of Financial Management EDI TI ON High vs. Low P/Es LT 10-9 A high P/E ratio: – indicates positive expectations for the future of the company – means the stock is more expensive relative to earnings – typically represents a successful and fast-growing company Block Hirt Short A low P/E ratio: – indicates negative expectations for the future of the company – may suggest that the stock is a better value or buy McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000