...QUESTIONNAIRE ON VALUING STOCKS By: Bahae eddine Boussouf Nadezda Vovk 1) Common stock: a share of ownership in the corporation, which confers rights to any common dividends as well as rights to vote on election of directors, mergers, or other major events. Preferred stock: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. Preferred and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors. In these instances when distributions are made, preferred stockholders must be paid before common stockholders. However, this claim is most important when the company must liquidate and pay all creditors and bondholders, common stockholders will not receive any money until after the preferred shareholders are paid out. Second, the dividends of preferred stocks are different from and generally greater than those of common stock. When you buy a preferred stock, you will have an idea of when to expect a dividend because they are paid at regular intervals. This is not necessarily the case for common stock, as the company's board of directors will decide whether...
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...Valuing Stocks 1. "As owners, what rights and advantages do shareholders obtain" (Cornett, Adair, & Nofsinger, 2014, p. 203)? They are able to participate in the economic growth of publicly traded firms without having to manage business entities directly. They have the right to residual cash flows of corporate profits and often receive some of these cash flows through dividends. In addition, shareholders vote on the members for board of directors and other proposals for the company. Shareholder capital losses are capped in that they can only lose their initial investment. Stocks are very liquid and investors can enjoy this liquidity in both their entrance into the stock market and their exit from it. 2. "Why might the Standard and Poor's 500 Index be a better measure of stock market performance than the Dow Jones Industrial Average" (Cornett, Adair, & Nofsinger, 2014)? The S&P 500 is a broad market index that includes stocks of the 500 largest US firms from ten sectors of the economy. It captures 80% of the overall stock market capitalization and is a good proxy for what is occurring in the overall stock market. 3. "What are the differences between common stock and preferred stock" (Cornett, Adair, & Nofsinger, 2014, p. 203)? Common stock dividends change over time, hopefully increasing in the long-term. Preferred stock pays a constant dividend. Preferred stockholders have higher precedence for payment in the event of firm liquidation...
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...The Buffett Approach to Valuing Stocks Focusing on return on capital may be the key to investment success. By Steven R. Ferraro, CFA, PhD 2009 Volume 12 Issue 3 Much has been written about famed U.S. investor and Berkshire Hathaway CEO Warren Buffett’s investment style and successes. Preeminent among these writings are the oft-cited Berkshire Hathaway shareholder letters, written by the “Oracle of Omaha” himself. These informative letters have been the basis for a multitude of books. But even with an abundance of available information on “how to invest like Warren Buffett,” it is apparent that something is lacking, how does Buffett determine an acceptable price for companies of interest? This article provides an example of the process Buffett is reported to go though to determine the intrinsic value of a publicly traded company. Photo: Bogdan Radenkovic Starting at the Beginning Before we get our hands dirty with the valuation aspects of the investment decision, let us review a brief outline of the qualitative and quantitative aspects of Buffett’s decision process as observed by Robert G. Hagstrom.[1] This map helps us navigate the turbulent waters of Wall Street and is comprised of business, management, financial, and market tenets. Investment Tenets Business • Is the business simple and understandable? • Does the business have a consistent operating history? • Does the business have favorable long-term prospects? Management • Is management...
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...Valuing of Coca Cola Stock and Analysis Andrew Burgoyne, James Desimone, Bailey Fowble, Hewei Huang, Ryan Leist, Maria Sandoval University of South Florida FIN 4414 Abstract Taking the role as Jessie Jones, we will analyze whether to recommend the Coca Cola stock to potential clients or current clients that do not have it in their portfolio. By using the Capital Asset Price Model (CAPM), Dividends Discount Model (DDM) and the Price/Earnings (P/E) ratio we will come to a conclusion. Background The Coca Cola Company, which is based out of Atlanta, Georgia, is a leader in the global soft drink market. It owns subsidiaries in over 195 countries around the world but has always remained local. According to the most recent Value Line (1997) report, revenues and profits were expected to continue to grow for the rest of the year but still be weaker than the current year. They forecasted that Coca Cola would meet their goal of increasing profits by 15% each year for the next 3-5 years due to the expanding soft drink market. Jessie Jones, an Investment Advisor with a major brokerage firm, wondered whether she should recommend the Coca Cola stock to any of her potential clients or current clients that did not already have it in their portfolios. Jessie noticed that the current price of Coke slipped to $58 per share with a price/earnings ratio of 35x and dividends yield of 1%. The methodologies used to value the stock of Coca Cola are: CAPM, DDM and P/E ratio. Assumptions ...
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...Date: MAY 1992 Subject: Valuing stock options in a compensation Package Purpose: To determine which option worth for Mrs Jameson, and how long should she stay at Telster. Q1,2: The stock currently trading at $18.75. (20.25-18.75)x3000=4500. If she choose cash compensation package and if there is no TAX, She will receive $5000+(5000x3.8%). Obviously it is worth than stock option. Q3: The options do not vest until the fifth year and the strike price is $35. What is the price of the 5-year option? If Jameson chose stock options, she would hold European 3000 call options (early exercise is impossible) on stocks without dividends which give her the right to buy Telstar stocks at the strike price $35 per share in the 5th year from the date she joins Telstar. The option price is $2.65. Total value of 3000 call options that Jameson would receive is 3000 x $2.65 = $7943 (taxes and transaction costs are ignored), which is option premiums that Jameson can receive if she sells her 3000 granted options. Q4: If Jameson chose cash compensation package and if there is no tax, she will receive $5000 today. If she used this money to invest in 5-year T-bills, the future value of her compensation would be worth: $5000 x 1.0602 = $5301 in 5 years. $7943 is worth than $5301. If she accepts deal (stock option and job), she should untie her wealth from the fortunes of Telstar by using bull spread strategy, which is to sell identical call options with higher strike price, for instance...
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...Wal-Mart Case Valuing Wal-Mart Stock Questions: 1. Assess the financial health of Wal-Mart based on an analysis of the financial statements. 2. Based on any additional available information (including annual reports and 10-K filings) assess the economic conditions (as of the time of the case), the industry key success factors and competitive situation, and Wal-Mart’s strengths and weaknesses. 3. Develop a pro forma income statement and balance sheet for Wal-Mart for the fiscal year ending January 31, 2006. Assume the following (in addition to information in the case): selling, general and administrative expenses at 17.3 percent of anticipated net sales; interest on debt at an average rate of four percent; similar number of shares outstanding as of January 31, 2005: similar prepaids, other assets, accrued liabilities, deferred taxes and minority interest as in 2005. State any other key assumptions. How profitable do you anticipate Wal-Mart will be? Will Wal-Mart need to increase its reliance on external borrowing? 4. Determine the intrinsic value of Wal-Mart (on a per share basis) using the dividend discount model (DDM). Assess the value based on three forms of the DDM: the constant growth version, an assessment based on three years of projected dividends and a projected future stock price, and the three-stage DDM. Clearly state any assumptions including an estimation of Wal-Mart investor required returns. 5. Determine the intrinsic value of Wal-Mart (on a per share basis)...
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...19, 2003 PETER TUFANO Sally Jameson: Valuing Stock Options in a Compensation Package Sally Jameson, a second-year MBA student at Harvard Business School, was thrilled but confused. It was late May 1992, graduation was approaching, and she had finally landed the job of her choice. She had just finished an early morning telephone conversation with Bob Marks, the MBA recruiting coordinator at Telstar Communications, a large, publicly held multinational company. Mr. Marks had offered Ms. Jameson a unique position in operations at Telstar, and from the description, it sounded exactly like the job that she wanted. Since her first interview with Telstar, she had been very impressed with the company and its people. While Ms. Jameson was certain that she would accept the job, there was still one unsettled, yet crucial, matter--her compensation. During the conversation with Marks, Jameson had asked what her compensation package would be. Marks: "Well, Sally, we are all very impressed with you and would like to offer you a starting salary of $50,000. In addition, you will also receive a signing bonus." Jameson: "The base salary is a little below what I had expected. Is that negotiable?" Marks: "I'm afraid not. That's the same starting package all MBAs get. However, you will receive a bonus upon accepting our offer. You can receive $5,000 in cash, or choose stock options instead." Jameson: "I'm not too familiar with stock options. Could you explain to me what they...
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...money between different types of investments, they must weigh the trade-off between risk and return. The purpose of the next four chapters is to explore that trade-off in depth. We begin in Chapters 4 and 5 by describing two of the most common types of investments available in the market—bonds and stocks. The bond market is vast, and it plays an extremely important role in the economy. Federal, state, and local governments issue bonds to finance all kinds of public works projects and to cover budget deficits. Corporations sell bonds to raise funds to meet daily operating needs and to pay for major investments. Chapter 4 describes the basic bond features and explains how investors value bonds. Chapter 5 examines the stock market. Valuing stocks is more complex than valuing bonds because stocks do not promise fixed payment streams as do bonds. Therefore, Chapter 5 discusses methods that investors and analysts use to estimate stock values. The chapter also provides a brief explanation of how firms work with investment bank- ers to sell stock to the public and how investors can trade shares of stock with each other. With the essential features of bonds and stocks in hand, Chapter 6 explores the historical returns earned by different classes of investments. The data illustrate that a fundamental trade-off between risk and return confronts investors. Chaucer was right. Investors who want to get rich have to accept risk as part of the deal. Chapter 7 quantifies...
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...19, 2003 PETER TUFANO Sally Jameson: Valuing Stock Options in a Compensation Package Sally Jameson, a second-year MBA student at Harvard Business School, was thrilled but confused. It was late May 1992, graduation was approaching, and she had finally landed the job of her choice. She had just finished an early morning telephone conversation with Bob Marks, the MBA recruiting coordinator at Telstar Communications, a large, publicly held multinational company. Mr. Marks had offered Ms. Jameson a unique position in operations at Telstar, and from the description, it sounded exactly like the job that she wanted. Since her first interview with Telstar, she had been very impressed with the company and its people. While Ms. Jameson was certain that she would accept the job, there was still one unsettled, yet crucial, matter--her compensation. During the conversation with Marks, Jameson had asked what her compensation package would be. Marks: "Well, Sally, we are all very impressed with you and would like to offer you a starting salary of $50,000. In addition, you will also receive a signing bonus." Jameson: "The base salary is a little below what I had expected. Is that negotiable?" Marks: "I'm afraid not. That's the same starting package all MBAs get. However, you will receive a bonus upon accepting our offer. You can receive $5,000 in cash, or choose stock options instead." Jameson: "I'm not too familiar with stock options. Could you explain to me what they...
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...UNIVERSITY OF MARYLAND Robert H. Smith School of Business BMGT343 – Investments Fall 2014 I. Information on Instructor Instructor: Professor Xiaohui Gao Bakshi Email: xiaohui@rhsmith.umd.edu (preferred method of contact) Office: 4426 Van Munching Mobile Phone: (240) 507 9877 Course Notes are on Canvas Office Hours: Tuesdays & Thursdays, 2pm to 3pm, and I am always available so always feel free to contact me. Class meeting venue and time: Section 0201 Tuesdays & Thursdays, 11am to 1215pm, VMH 1418 Section 0301 Tuesdays & Thursdays, 1230pm to 145pm, VMH 1418 Review sessions by the TA: some Thursdays, 5pm to 6pm, Review sessions by the instructor: some Fridays, 1245pm to 145pm, II. Course Description and Objectives • Required Textbook “Essentials of Investments”, by Bodie, Kane, and Marcus, McGraw-Hill, 9th edition • Required Course packet Purchase the course packet at: https://cb.hbsp.harvard.edu/cbmp/access/27906209 The course packet contains four cases. • Course Overview This course is an introductory course in investments. We cover the following topics (the chapters are from BKM): Note: The schedule given below is only tentative, and may be changed based on the progress of the class. It is a student’s responsibility to read the assigned chapters, as information in them may be part of a quiz or an exam. Week Week 1 Week 2 Week 3 BMGT343 Topic Introduction Debt securities – I Debt securities – II Reading Chapter 1, 2, and 3 Chapter 10 Chapter 11 Xiaohui Gao Bakshi ...
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...FIN 540 – Homework Answer Key Chapter 22 1. Which of the following statements is most CORRECT? a. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. b. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. c. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm. d. Operating economies are never a motive for mergers. e. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers. 2. Which of the following statements is most CORRECT? a. Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return. b. The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis...
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...share FCFE per Share in 1995 = 86.53 Pt / share * The leverage is stable Background Information * Current Information: * Earnings per Share = 154.53 Pt * Capital Expenditures per share = 421 Pt * Depreciation per share = 285 Pt * Change in Working Capital / Share = None * Debt Financing Ratio = 50% * Earnings, Capital Expenditures and Depreciation are all expected to grow 10% a year * The beta for the stock is 0.90, and the Spanish long bond rate is 9.50%. A premium of 6.50% is used for the Spanish market. Valuation * Cost of Equity = 9.50% + 0.90 (6.50%) = 15.35% * Expected Growth Rate = 10.00% * Base Year FCFE Earnings per Share = 154.53 - (Capital Expenditures - Depreciation) (1 - Debt Ratio) = (421-285)(1-.5) = - 68.00 - (Change in Working Capital) (1 - Debt Ratio) = 0 (1-.5) = - 0.00 = FCFE = 86.53 Value per Share = 86.53 (1.10)/ (.1535 - .10) = 1779 Pt The stock was trading for 1788 Pt in January 1996. Illustration 8: Valuing a firm with depressed earnings: Daimler Benz A rationale for using the FCFE Stable Model * As one of the largest firms in a mature sector, it is unlikely that Daimler Benz will be able to register super normal growth over time. * Like most German firms, the dividends paid bear no resemblance to the cash flows generated. * The leverage is stable...
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...Topic 1 business valuation introduction Financial assets Three main types: 1.fixed interest or Debt 2.Shares or Equity 3. Derivative Securities (Futures, Options) Fixed interest: 1.Payments fixed or determined by a formula 2. Money market debt: short, term, highly marketable(市场的), usually low credit risk 3. Capital market debt: long term bonds, can be safe or risky 4.Subject to Interest Rate movements (Yield Curve) and Credit Risk Equity Securities: 1.ownership of a corporate entity 2.secondary markets liquid and low cost 3.Residual claim on assets after debt 4. Limited liability (no resource for debtors) 5. Receive dividends& franking credits 6.most volatile asset class (30% typical) 6.most volatile asset class(类别) 7. Highest return asset class How firms issue securities(有价证券) Primary Market (IPO) 1. Firms issue new securities through underwriter(承销商) to public 2. Investors get new securities, firm gets funding Secondary market Investors trade previously issued securities on financial markets Financial market and the Economy 1.Information Role: Capital flows to companies with best prospects 2. Consumption Timing: Use securities to store wealth 3. Allocation of Risk: Investors can select securities consistent with their tastes for risk 4.Separation of Ownership and Management: With stability comes agency problems Efficient Market Hypothesis (EMH) 1. Weak EMH: Prices reflect all past information. →Cannot make money from charting. (记录表格) 2. Semi-strong...
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...S w 9B11N004 VALUING WAL-MART - 20101 Cyrus Zahedi wrote this case under the supervision of Professor Jim Hatch solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2011, Richard Ivey School of Business Foundation Version: 2011-03-15 In early February 2010, Sabrina Gupta, an investment advisor with a major brokerage firm, was examining Wal-Mart Stores, Inc. (Wal-Mart) stock and its valuation. Gupta wondered whether to recommend the stock to any of her new clients or to existing clients who did not currently have Wal-Mart in their portfolios. BACKGROUND OF WAL-MART STORES, INC. Based in Bentonville, Arkansas, and founded by the legendary Sam Walton, Wal-Mart was the world’s largest retailer, operating more than 8,400 stores worldwide...
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...estimated to be $ 170 billion and there are 1204 million shares outstanding. What is the value per share? 2 An added fact l On September 30, 1997, Microsoft had 258 million options outstanding, granted to employees over time. These options had an average exercise price of $ 42 (the current stock price i $ 140). Estimate the value per share. 3 Equity Value and Per Share Value l l The conventional way of getting from equity value to per share value is to divide the equity value by the number of shares outstanding. This approach assumes, however, that common stock is the only equity claim on the firm. In many firms, there are other equity claims as well including: – warrants, that are publicly traded – management and employee options, that have been granted, but do not trade – conversion options in convertible bonds – contingent value rights, that are also publicly traded. l The value of these non-stock equity claims has to be subtracted from the value of equity before dividing by the number of shares outstanding. 4 Warrants l l l A warrant is a security issued by a company that provides the holder with the right to buy a share of stock in the company at a fixed price during the life of the warrant. A warrant is therefore a long term call option on the equity of the firm and can be valued using option pricing models. Warrants and other equity options issued by the firm are claims on the equity of the firm and have to be treated as equity...
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