2.6. Valuing common stocks – the expected rate of return

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来自 Moscow Institute of Physics and Technology 的课程

Principles of Corporate Finance – A Tale of Value

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Moscow Institute of Physics and Technology

Principles of Corporate Finance – A Tale of Value

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课程 2（共 5 门，Specialization Understanding Modern Finance）

The study of Corporate Finance seems to be a very generic part of business education. Still, it either falls in the trap of intimidating formulas or is superficially journalistic. Both extremes preclude the understanding of the core finance ideas, concepts, and models. This Course is an attempt to avoid the above extremes. We discuss the core basis and mechanisms of modern corporate finance in a learner-friendly way. We will analyze the market’s most fundamental problems, realize the intrinsic interests and preferences of investors, reveal the true meaning of specific financial terms, and uncover important issues that are so often ignored in choosing and valuing investment projects. The learners will gain insight into the essence of corporate finance. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses.

从本节课中

Applications of NPV. Valuing Bonds and Stocks

Week 2 of the Course is devoted to the applications of NPV. In the first part of the week we use NPV to study riskless debt. Of special attention will be the challenges in valuing even riskless bonds. We discuss bond parameters and the special role of yield to maturity. Then we demonstrate how the NPV approach helps determine spot and forward interest rates. The second part of Week 2 deals with the core concepts in valuing equity. We introduce the idea of the common stock value as a function of its cash disbursements. Then we present some formulas that are used to value common stock on the basis of NPV. We focus on growth as a major contributor to the stock value. We analyze growth drivers and the mechanism of growth. On an example we reveal the influence of investments on the stock value. Finally, we pose some questions with respect to NPV approach.

2.1. Introduction – a simple way to value bonds and stocks3:07

2.2. Valuing riskless debt6:37

2.3. Bond cash flows and other parameters. Yield to maturity10:12

2.4. Calculating spot rates8:01

2.5. Forward rates – the idea and calculation8:53

2.6. Valuing common stocks – the expected rate of return5:13

2.7. The general stock valuation formula. The “tail”7:09

2.8. The model of growth. PVGO5:55

2.9. A constant growing company – an example10:05

2.10. – What’s ahead?2:41

与讲师见面

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

Now we are shifting focus and are moving toward stocks.

Well, clearly the stock market is huge and

it's extremely important to come up with certain evaluation approaches for stocks.

And that will be the central part of this course.

And now we are just beginning.

Well, what do we know about stocks in general?

We know that these are public securities, that they are traded, that they are risky.

And one thing with respect to what we've been learning about NPV

is that cash flows offered to stock holders are not certain at all.

What is the form of these cash flows?

You know that, basically, stockholders,

Have two fundamental rights, one is the right to vote and

the other is the right to claim, Dividends.

Well, as we know, dividends are not paid always.

But that means that investors they make their choice

about which we talked about in the first week.

And they just decide to keep this cash in the company because they believe that for

them it's better to reinvest than to pocket this money and

then to look for some other ways of investing.

Now, the right to vote is very important, but we ignore it for now.

Because we will talk about that in the fourth course of this

specialization when we talk about [INAUDIBLE].

But for now, we just study stocks with respect to their cash flows.

Now, in order to proceed, let's start with the most simplistic example.

Imagine the one period project,

so you bought a share of stock at P sub 0 here, at point one.

You are expected to receive dividend one.

And also you can, right after receipt of this dividend,

you can sell the stock at the price P1.

So what is your expected return on this kind of investment?

Well, it's pretty clear, your expected return is equal to.

So the cash flow that you receive, this is DIV1 plus P1,

then you subtract P sub 0, this is what you've invested,

and then you divide that by P sub 0.

So if we looked at that, we can find two blocks here.

One block is this, this is called dividend yield.

And this one is called capital gain.

So basically, if this stock does not pay a dividend,

then your only expected cash inflow is,

if P1 is greater than P sub 0, you decide to sell and then you get some money.

If you're forced to sell for whatever reason and there's no dividend,

P1 is smaller than P sub 0, then you'll lose money.

If, for example you opt not to sell at all at this point, but

you receive all of the dividend, then this is your total yield.

Well, we can get a very simple example for

it if P sub 0 is $100 and P1 is $105.

Well, people always expect that the stocks rise.

And then if dividend at 0.1 is expected to be $8 per share,

then clearly we can rewrite this formula and

see that that expected return will consist of two parts.

Dividend yield will be 8%, Plus capital gain will be 5%.

And the total of 13%, which is a very nice return but

clearly this is just an example.

Now, what we did so

far seems to have nothing to do with PV.

We just introduced the most simplistic approaches to expected returns and

we analyzed stock cash flows.

But it doesn't require a lot of mental advancement to move from this formula

to the one that will look very much like the PV formula for the stocks.

We will rewrite this equation.

We will think thoroughly what this trick would mean.

And from that, we will proceed and

come very close to the general stock price and formula.

That's what we will do in our next episode.

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