Finance

Finance
Prof. Nuno Fernandes
[email protected]
Session Contents

Stocks – Terminology

Stocks valuation

Growth and Income
Prof. Nuno Fernandes
MBA Finance – 2005/2006
2
1
Terminology

Shares

Dividends

PER or P/E

P/B

EPS

DPS
Prof. Nuno Fernandes
MBA Finance – 2005/2006
3
Stock Exchange

Primary Market – Initial Public
Offers. First time it goes public. The
market for new securities issues.

Secondary Market – Exchange
Traded Shares after IPO.
Prof. Nuno Fernandes
MBA Finance – 2005/2006
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2
DY and ROE
Dividend Yield =
Div1
P0
Return on Equity = ROE
ROE =
Prof. Nuno Fernandes
EPS
Book Equity Per Share
MBA Finance – 2005/2006
5
Portugal Telecom
P = 8.50
Number of shares = 1.166 M.
Net Income 2004 = € 500 M.
Last dividend= 0.35 / share
Source: Reuters 2006/1/17, Company Accounts, Yahoo Finance
Prof. Nuno Fernandes
MBA Finance – 2005/2006
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3
Microsoft
P = 27.08
Number of shares = 10.850 M.
Net Income 2005 = $ 12.254 M.
Last dividend= 0.33 / share
Source: Reuters 2006/1/17, Company Accounts, Yahoo Finance
Prof. Nuno Fernandes
MBA Finance – 2005/2006
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Expected Return
Prof. Nuno Fernandes
MBA Finance – 2005/2006
8
4
Expected Return
E(R)=Rate of Return =
Prof. Nuno Fernandes
Div1 + P1 − P0
P0
MBA Finance – 2005/2006
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Expected Return
Dividends + Capital Gain
E(R) =
Prof. Nuno Fernandes
Div 1 P1 − P0
+
P0
P0
MBA Finance – 2005/2006
10
5
Stocks Valuation
Prof. Nuno Fernandes
MBA Finance – 2005/2006
11
Valuation – As always…..NPV
∞
CF1
CF2
CF3
CFt
CFt
NPV =
+
+
+ ... +
=∑
2
3
t
t
(1 + r ) (1 + r ) (1 + r )
(1 + r )
t =1 (1 + r )
Prof. Nuno Fernandes
MBA Finance – 2005/2006
12
6
Valuation - Dividend Discount Model
Prof. Nuno Fernandes
P0 =
DIV1
P
DIV1 + P1
+ 1 =
1+ r 1+ r
1+ r
P1 =
DIV2
P
DIV2 + P2
+ 2 =
1+ r 1+ r
1+ r
MBA Finance – 2005/2006
13
Valuation - Dividend Discount Model
P0 =
DIV1
DIV2
DIV3
DIVH + PH
+
+
+ ... +
2
3
(1 + r ) (1 + r ) (1 + r )
(1 + r ) H
∞
DIV1
DIV2
DIV3
DIVt
DIVt
P0 =
+
+
+ ... +
=∑
2
3
t
t
(1 + r ) (1 + r ) (1 + r )
(1 + r )
t =1 (1 + r )
Prof. Nuno Fernandes
MBA Finance – 2005/2006
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7
Valuation - Dividend Discount Model
P0 =
Div1
Div2
Div H + PH
+
+
...
+
(1 + r )1 (1 + r ) 2
(1 + r ) H
Prof. Nuno Fernandes
MBA Finance – 2005/2006
15
Valuation - Perpetuity
P0 =
Div1
r

Constant Dividends

Inputs: Div1, r
Prof. Nuno Fernandes
MBA Finance – 2005/2006
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8
Valuation – Growing Perpetuity
P0 =
Div1
r−g

Dividends growing at a g constant
rate

Inputs: Div1, r, g
Prof. Nuno Fernandes
MBA Finance – 2005/2006
17
Applications
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MBA Finance – 2005/2006
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9
Valuation – Stable Company
P0 =
Div1
r−g

g ≤ Economic growth

Price is very sensitive to the g rate.
Prof. Nuno Fernandes
MBA Finance – 2005/2006
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Value per share and growth rate
600
500
400
300
200
100
0
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
grow th rate
Prof. Nuno Fernandes
MBA Finance – 2005/2006
20
10
EDP
P = 2.79
Number of shares = 3.000 M.
Net Income 2004 = € 440 M.
Last Dividend = 0.092/share
Fonte: Reuters 2006/1/17, Company Accounts, Yahoo Finance
Prof. Nuno Fernandes
MBA Finance – 2005/2006
21
Dividends EDP
0.105
0.1
0.095
0.09
0
2
4
6
8
10
12
time
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MBA Finance – 2005/2006
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11
Two-Stage DDM
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MBA Finance – 2005/2006
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Constant Growth Rate
6%
4%
2%
0%
0
5
10
15
Period
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MBA Finance – 2005/2006
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12
Two-Stage DDM: Growth Rates
15%
10%
5%
0%
0
5
10
15
Period
Prof. Nuno Fernandes
MBA Finance – 2005/2006
25
Valuation – Two-Stage DDM
DIVn +1
n
DIV (1 + g1 )t ( r − g 2 )
+
P0 = ∑
t
(1
+
)
(1 + r ) n
r
t =1

First phase with n years of high
growth (g1)

g2 ≤ economic growth
Prof. Nuno Fernandes
MBA Finance – 2005/2006
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13
Dividends PT
0.6
0.5
0.4
0.3
0.2
0.1
0
0
2
4
6
8
10
12
14
time
Prof. Nuno Fernandes
MBA Finance – 2005/2006
27
Learning Experience

Basic Knowledge of Equity Markets
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Company Valuation

DCF / Dividend Discount Model
Prof. Nuno Fernandes
MBA Finance – 2005/2006
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14