1

The Valuation of
Long-Term
Securities

Bond & Stock
Valuation
2
The Valuation of
Long-Term Securities
Distinctions Among Valuation
Concepts
Bond Valuation
Preferred Stock Valuation
Common Stock Valuation
Rates of Return (or Yields)
3
What is Value?
Going-concern value represents the
amount a firm could be sold for as a
continuing operating business.
Liquidation value represents the
amount of money that could be
realized if an asset or group of
assets is sold separately from its
operating organization.
4
In general, the value of an asset is
the price that a willing and able buyer
pays to a willing and able seller
Note that if either the buyer or seller
is not both willing and able, then an
offer does not establish the value of
the asset
What is Value?
5
Several Kinds of Value
There are several types of value, of which we
are concerned with three:
Book Value - The assets historical cost less
its accumulated depreciation
Market Value - The price of an asset as
determined in a competitive marketplace
Intrinsic Value - The present value of the
expected future cash flows discounted at
the decision makers required rate of return
6
Bond Valuation
Important Terms
Types of Bonds
Valuation of Bonds
Handling Semiannual
Compounding
7
Bonds
A bond is a tradeable instrument that
represents a debt owed to the owner by the
issuer. Most commonly, bonds pay interest
periodically (usually semiannually) and then
return the principal at maturity.
Most corporate, and some government,
bonds are callable. That means that at the
companys option, it may force the
bondholders to sell them back to the
company.

(Refer to the bonds valuation handout)
8
Bond Terminology
There are several terms with which you must be
familiar to solve bond valuation problems:
Coupon Rate - This is the stated rate of interest on the bond.
It is fixed for the life of the bond. Also, this rate time the face
value determines the annual interest payment amount.
Discount Rate - (capitalization rate or market required rate of
return) is dependent on the risk of the bond and is
composed of the risk-free rate plus a premium for risk.
Face Value - This is the principal amount (nominally, the
amount that was borrowed). This is the amount that will be
repaid at maturity
Maturity Date - This is the date after which the bond no
longer exists. It is also the date on which the loan is repaid
and the last interest payment is made.
9
Calculating the Value of a Bond
There are two types of cash flows that are
provided by a bond investments:
Periodic interest payments (usually every six
months, but any frequency is possible)
Repayment of the face value (also called the
principal amount, which is usually $1,000) at
maturity
The following timeline illustrates a typical bonds
cash flows:
0 1 2 3 4 5
100 100 100 100 100
1,000
10
We can use the principle of value additivity to find
the value of this stream of cash flows
Note that the interest payments are an annuity,
and that the face value is a lump sum
Therefore, the value of the bond is simply the
present value of the annuity-type cash flow and
the lump sum:
( )
( )
V Pmt
k
k
FV
k
B
d
N
d
d
N
=

(
(
(
(
+
+
1
1
1
1
Calculating the Value of a Bond
(Cont)
Discussed
In the
subsequent
slides
11
Different Types of Bonds
Perpetual Bond
Non-Zero Coupon Bond
Zero Coupon Bond


12
Different Types of Bonds
A perpetual bond is a bond that never
matures. It has an infinite life.
(1 + k
d
)
1
(1 + k
d
)
2
(1 + k
d
)

V =
+ + ... +
I I I
= E

t=1
(1 + k
d
)
t
I
or I (PVIFA
k
d
,
)
V = I / k
d
[Reduced Form]
13
Perpetual Bond Example
Bond P has a $1,000 face value and
provides an 8% coupon. The appropriate
discount rate is 10%. What is the value of
the perpetual bond?



I = $1,000 ( 8%) = $80.
k
d
= 10%.
V = I / k
d
[Reduced Form]
= $80 / 10% = $800.
14
Different Types of Bonds
A non-zero coupon-paying bond is a
coupon-paying bond with a finite life.
(1 + k
d
)
1
(1 + k
d
)
2
(1 + k
d
)
n
V =
+ + ... +
I I + MV I
= E
n
t=1
(1 + k
d
)
t
I
V = I (PVIFA
k
d
, n
) + MV (PVIF
k
d
, n
)
(1 + k
d
)
n
+
MV
15
Bond C has a $1,000 face value and provides
an 8% annual coupon for 30 years. The
appropriate discount rate is 10%. What is the
value of the coupon bond?
Coupon Bond Example
V = $80 (PVIFA
10%, 30
) + $1,000 (PVIF
10%, 30
)
= $80 (9.427) + $1,000 (.057)
[Table IV] [Table II]
= $754.16 + $57.00
= $811.16 (D to R)
16
Coupon Bond Example
( Ms Excel Approach)
Present Value Calculations
Future Value 1000.00
Years 30
Rate 10%
Present Value $57.31
Present Value of an Annuity
Payment 80
Interest Rate 10%
Number of Payments 30
Present Value $754.15
VALUE $811.46
17
Different Types of Bonds
A zero-coupon bond is a bond that
pays no interest but sells at a deep
discount from its face value; it provides
compensation to investors in the form
of price appreciation.
(1 + k
d
)
n
V =
MV
= MV (PVIF
k
d
, n
)
18
V = $1,000 (PVIF
10%, 30
)
= $1,000 (.057)
= $57.00 (D to R)
Zero-Coupon Bond
Example
Bond Z has a $1,000 face value and
a 30-year life. The appropriate
discount rate is 10%. What is the
value of the zero-coupon bond?
19
Non-Zero Coupon Bond Example
( Ms Excel Approach)
Present Value Calculations
Future Value 1000.00
Years 30
Rate 10%
Present Value $57.31
VALUE $57.31
20
Semiannual Compounding
(1) Divide k
d
by 2
(2) Multiply n by 2
(3) Divide I by 2
Most bonds in the U.S. pay interest
twice a year (1/2 of the annual
coupon).
Adjustments needed:
21
(1 + k
d
/2 )
2
*
n
(1 + k
d
/2 )
1
Semiannual Compounding
A non-zero coupon bond adjusted for
semiannual compounding.
V = + + ... +
I / 2 I / 2 + MV
= E
2*n
t=1
(1 + k
d
/2 )
t
I / 2
= I/2 (PVIFA
k
d
/2 ,2*n
) + MV (PVIF
k
d
/2 , 2*n
)
(1 + k
d
/2 )
2
*
n
+
MV
I / 2
(1 + k
d
/2 )
2
22
V = $40 (PVIFA
5%, 30
) + $1,000 (PVIF
5%, 30
)
= $40 (15.373) + $1,000 (.231)
[Table IV] [Table II]
= $614.92 + $231.00
= $845.92 ( D to R)
Semiannual Coupon
Bond Example
Bond C has a $1,000 face value and provides
an 8% semiannual coupon for 15 years. The
appropriate discount rate is 10% (annual rate).
What is the value of the coupon bond?
23
Semi Annual Coupon Bond Example
( Ms Excel Approach)
Present Value Calculations
Future Value 1000.00
Years 30
Rate 5%
Present Value $231.38
Present Value of an Annuity
Payment 40
Interest Rate 5%
Number of Payments 30
Present Value $614.90
VALUE $846.28
24
Different Types of Stocks



Preferred Stock
Common Stock

25
Preferred Stock is a type of stock that
promises a (usually) fixed dividend, but at
the discretion of the board of directors.
Preferred Stock Valuation
Preferred Stock has
preference over common
stock in the payment of
dividends and claims on
assets.
26
Preferred Stock Valuation
This reduces to a perpetuity!
(1 + k
P
)
1
(1 + k
P
)
2
(1 + k
P
)

V =
+ + ... +
Div
P
Div
P
Div
P
= E

t=1
(1 + k
P
)
t
Div
P
or Div
P
(PVIFA
k
P
,
)
V = Div
P
/ k
P
27
Preferred Stock Example
Div
P
= $100 ( 8% ) = $8.00.
k
P
= 10%.
V = Div
P
/ k
P
= $8.00 / 10%
= $80
Stock PS has an 8%, $100 par value
issue outstanding. The appropriate
discount rate is 10%. What is the value
of the preferred stock?
Similar to
Perpetual
Bonds
28
Common Stock Valuation
Pro rata share of future
earnings after all other
obligations of the firm
(if any remain).
Dividends may be paid
out of the pro rata share
of earnings.
Common stock represents a residual
ownership position in the corporation.
29
Common Stock Valuation
(1) Future dividends
(2) Future sale of the
common stock shares
What cash flows will a shareholder
receive when owning shares of
common stock?
30
Dividend Valuation Model
Basic dividend valuation model accounts
for the PV of all future dividends.
(1 + k
e
)
1
(1 + k
e
)
2
(1 + k
e
)

V =
+ + ... +
Div
1
Div
Div
2
= E

t=1
(1 + k
e
)
t
Div
t
Div
t
: Cash dividend
at time t

k
e
: Equity investors
required return
31
Adjusted Dividend
Valuation Model
The basic dividend valuation model
adjusted for the future stock sale.
(1 + k
e
)
1
(1 + k
e
)
2
(1 + k
e
)
n
V =
+ + ... +
Div
1
Divn + Pricen Div
2
n: The year in which the firms
shares are expected to be sold.
Price
n
: The expected share price in year n.
32
Dividend Growth
Pattern Assumptions
The dividend valuation model requires
the forecast of all future dividends.
The following dividend growth rate
assumptions simplify the valuation
process.
Constant Growth
No Growth
33
Constant Growth Model
The constant growth model assumes that
dividends will grow forever at the rate g.
(1 + k
e
)
1
(1 + k
e
)
2
(1 + k
e
)

V =
+ + ... +
D
0
(1+g) D
0
(1+g)

=
(k
e
- g)
D
1
D
1
: Dividend paid at time 1.

g

: The constant growth rate.

ke: Investors required return.
D
0
(1+g)
2
34
Constant Growth
Model Example
Stock CG has an expected growth rate of
8%. Each share of stock just received an
annual $3.24 dividend per share. The
appropriate discount rate is 15%. What
is the value of the common stock?
D
1
= $3.24 ( 1 + .08 ) = $3.50
V
CG
= D
1
/ ( k
e
- g ) = $3.50 / ( .15 - .08 )
= $50
k
e
= D1/V + g
35
Zero Growth Model
The zero growth model assumes that
dividends will grow forever at the rate g = 0.
(1 + k
e
)
1
(1 + k
e
)
2
(1 + k
e
)

V
ZG
=
+ + ... +
D
1
D

=
k
e
D
1
D
1
: Dividend paid at time 1.

k
e
: Investors required return.
D
2
36
Zero Growth
Model Example
Stock ZG has an expected growth rate of
0%. Each share of stock just received an
annual $3.24 dividend per share. The
appropriate discount rate is 15%. What
is the value of the common stock?
D
1
= $3.24 ( 1 + 0 ) = $3.24

V
ZG
= D
1
/ ( k
e
- 0 ) = $3.24 / ( .15 - 0 )
= $21.60
37
Practice Questions
1. Beta Budget Brooms will pay a big $2 dividend next year on
its common stock, which is currently selling at $50 per share.
What is the market's required return on this investment if the
dividend is expected to grow at 5% forever?
2. What is the intrinsic value of a $1,000 face value, zero-
coupon bond that matures in 20 years if an investor's
required rate of return for the bond is 8%? (Assume annual
discounting.)
3. What is the intrinsic value of a $1,000 face value, 8% coupon
paying perpetual bond if an investor's required rate of return
is 6%? (Assume annual interest payments and discounting.)
4. A $250 face value share of preferred stock, pays a $20 annual
dividend and investors require a 7% return on this
investment. If the security is currently selling for $276, what
is the difference (overvaluation) between its intrinsic and
market value (rounded to the nearest whole dollar)?
38
Practice Questions
5. You have just purchased a 15-year, $1,000 par value bond. The
coupon rate on this bond is nine percent (9%) annually, with
interest being paid each six months. If you expect to earn a 12
percent nominal rate of return on this bond, how much did you
pay for it?
6. WeeWiggly Woodcarvers (WWW) common stock is currently
expected to maintain its current earnings level indefinitely
(earnings will stay at the current $4.00 per share). Investors in
WWW expect to earn 10% on this investment since the firm
anticipates retaining only 10% of earnings. What is the
intrinsic value of a share of WWW?
7. You have been asked to determine the intrinsic value of a
share of Quick Quilters, Inc. (QQ) common stock. The stock
most recently paid a $2.00 annual dividend (D
0
). You expect
dividends to grow at a supernormal rate of 15% for the next
three years. You then expect that dividends will grow at a
normal 5% rate thereafter (indefinitely). As a potential investor,
you would expect to earn 10% on this investment. What is the
intrinsic value of a share of QQ?

39
ANSWERS
1. 9%
2. $214.55
3. $1333.33
4. $9.71; Hence $10 ( due to rounding)
5. $793.53
6. $36.00
7. $54.55




40
Bonds
&
Stocks
Yields (Rates of Return )
41
Yield to Maturity
The yield to maturity is an
important number in bond
valuation.
It is the rate which
equates the market price
of the bond with the value
of the discounted cash
flows.
That is, YTM is the k
d

such that the bond
equation holds.
42
Determining Bond YTM
Determine the Yield-to-Maturity
(YTM) for the coupon-paying bond
with a finite life.
P
0
=
n
t=1
(1 + k
d
)
t
I
= I (PVIFA
k
d
, n
) + MV (PVIF
k
d
, n
)
(1 + k
d
)
n
+
MV
k
d
= YTM
43
44
Determining the YTM
Julie Miller want to determine the YTM
for an issue of outstanding bonds at
Basket Wonders (BW). BW has an
issue of 10% annual coupon bonds
with 15 years left to maturity. The
bonds have a current market value of
$1,250.
What is the YTM?
45
YTM Solution (Try 9%)
$1,250 = $100(PVIFA
9%,15
) +
$1,000(PVIF
9%, 15
)
$1,250 = $100(8.061) +
$1,000(.275)
$1,250 = $806.10 + $275.00
= $1,081.10
[Rate is too high!]
46
YTM Solution (Try 7%)
$1,250 = $100(PVIFA
7%,15
) +
$1,000(PVIF
7%, 15
)
$1,250 = $100(9.108) +
$1,000(.362)
$1,250 = $910.80 + $362.00
= $1,272.80
[Rate is too low!]
47
.07 $1273
.02 YTM $1250 $192
.09 $1081

($23)(0.02)
$192
YTM Solution (Interpolate)
$23
X
X = X = .0024
YTM = .07 + .0024 = .0724 or 7.24%
48
YTM Solution ( Ms Excel Approach)
YTM (kd) of a NON-ZERO COUPOIN BOND
Present Value Calculations (PVIF) for "M.V."
Future Value $1,000.00
Years 15
YTM (k
d
) 7.22%
Present Value $351.45
Present Value of an Annuity for "INTEREST"
Future Value $1,000.00
Coupon Rate 10%
Payment $100.00
YTM (k
d
) 7.22%
Number of Payments 15
Present Value $898.27
VALUE $1,249.72
49
YTM = INT + {(FV C.P)/n}
(FV + C.P)/2
= 100 + {(1000 1250)/15}
(1000+1250)/2
= 0.074 = 7.4%(Approximate)
Yield Approximation Formula
50
Determining Semiannual
Coupon Bond YTM
P
0
=
2n
t=1
(1 + k
d
/2 )
t
I / 2
= (I/2)(PVIFA
k
d
/2
, 2n
) + MV(PVIF
k
d
/2

, 2n
)
+
MV
[ 1 + (k
d
/ 2) ]
2
-1 = YTM
Determine the Yield-to-Maturity
(YTM) for the semiannual coupon-
paying bond with a finite life.
(1 + k
d
/2 )
2
n
51
Determining the Semiannual
Coupon Bond YTM
Julie Miller want to determine the YTM
for another issue of outstanding
bonds. The firm has an issue of 8%
semiannual coupon bonds with 20
years left to maturity. The bonds
have a current market value of $950.
What is the YTM?
52
Determining Semiannual
Coupon Bond YTM
[ 1 + (k
d
/ 2) ]
2
-1 = YTM
Determine the Yield-to-Maturity
(YTM) for the semiannual coupon-
paying bond with a finite life.
[ 1 + (.042626) ]
2
-1 = .0871
or 8.71%
53
Determining Semiannual
Coupon Bond YTM
[ 1 + (k
d
/ 2) ]
2
-1 = YTM
This technique will calculate k
d
.
You must then substitute it into the
following formula.
[ 1 + (.0852514/2) ]
2
-1 = .0871
or 8.71% (same result!)
54
YTM Solution ( Ms Excel Approach)
YTM (kd) - Semi Annual Compounding
Present Value Calculations (PVIF) for "M.V."
Future Value $1,000.00
Years 40
YTM (k
d
/2) 4.263%
Present Value $188.31
Present Value of an Annuity for "INTEREST"
Future Value $1,000.00
Coupon Rate 4%
Payment $40.00
YTM (k
d
/2) 4.263%
Number of Payments 40
Present Value $761.70
VALUE $950.00
55
Note: The investor uses the bond's
computed YTM by comparing it to his/her
required rate of return on the bond after
considering all risk factors.
1) If the investor's required return is
greater than the YTM, the investor
should not buy the bond
2) If the investor's required return is
less than the YTM, the investor should
buy the bond
Guideline to YTM
56

57
Bond Price-Yield
Relationship
Discount Bond -- The market required rate of
return exceeds the coupon rate (Par > P
0
).
Premium Bond -- The coupon rate exceeds the
market required rate of return (P
0
> Par).
Par Bond -- The coupon rate equals the market
required rate of return (P
0
= Par).

58
Bond Price Par ( Ms Excel Approach)
Bond Price (Par)
Coupon Rate = 10%
Present Value Calculations (PVIF) for "M.V."
Future Value 1,000.00 $
Years 15
YTM (k
d
) 10.00%
Present Value $239.39
Present Value of an Annuity for "INTEREST"
Future Value $1,000.00
Coupon Rate 10%
Payment $100.00
YTM (k
d
) 10.00%
Number of Payments 15
Present Value $760.61
VALUE $1,000.00
59
Bond Price Discount ( Ms Excel Approach)
Bond Price (Discount)
Coupon Rate = 10%
Present Value Calculations (PVIF) for "M.V."
Future Value 1,000.00 $
Years 15
YTM (k
d
) 12.00%
Present Value $182.70
Present Value of an Annuity for "INTEREST"
Future Value $1,000.00
Coupon Rate 10%
Payment $100.00
YTM (k
d
) 12.00%
Number of Payments 15
Present Value $681.09
VALUE $863.78
60
Bond Price Premium ( Ms Excel Approach)
Bond Price (Premium)
Coupon Rate = 10%
Present Value Calculations (PVIF) for "M.V."
Future Value 1,000.00 $
Years 15
YTM (k
d
) 8.00%
Present Value $315.24
Present Value of an Annuity for "INTEREST"
Future Value $1,000.00
Coupon Rate 10%
Payment $100.00
YTM (k
d
) 8.00%
Number of Payments 15
Present Value $855.95
VALUE $1,171.19
61
Bond Price-Yield
Relationship
Coupon Rate
MARKET REQUIRED RATE OF RETURN (%)
B
O
N
D

P
R
I
C
E

(
$
)

1000
Par
1600
1400
1200
600
0
0 2 4 6 8 10 12 14 16 18
5 Year
15 Year
62
Bond Price-Yield
Relationship
Assume that the required rate of
return on a 15-year, 10% coupon-
paying bond rises from 10% to 12%.
What happens to the bond price?
When interest rates rise, then the
market required rates of return rise
and bond prices will fall.
63
Bond Price-Yield
Relationship
Coupon Rate
MARKET REQUIRED RATE OF RETURN (%)
B
O
N
D

P
R
I
C
E

(
$
)

1000
Par
1600
1400
1200
600
0
0 2 4 6 8 10 12 14 16 18
15 Year
5 Year
64
Bond Price-Yield
Relationship (Rising Rates)
Therefore, the bond price has
fallen from $1,000 to $864.

The required rate of return on a 15-
year, 10% coupon-paying bond
has risen from 10% to 12%.
Refer
Slide #
55
65
Bond Price-Yield
Relationship
Assume that the required rate of
return on a 15-year, 10% coupon-
paying bond falls from 10% to 8%.
What happens to the bond price?
When interest rates fall, then the
market required rates of return fall
and bond prices will rise.
66
Bond Price-Yield
Relationship
Coupon Rate
MARKET REQUIRED RATE OF RETURN (%)
B
O
N
D

P
R
I
C
E

(
$
)

1000
Par
1600
1400
1200
600
0
0 2 4 6 8 10 12 14 16 18
15 Year
5 Year
67
Bond Price-Yield Relationship
(Declining Rates)
Therefore, the bond price has
risen from $1,000 to $1,171.

The required rate of return on a 15-
year, 10% coupon-paying bond
has fallen from 10% to 8%.
Refer
Slide #
56
68
The Role of Bond Maturity
Assume that the required rate of return
on both the 5- and 15-year, 10% coupon-
paying bonds fall from 10% to 8%. What
happens to the changes in bond prices?
The longer the bond maturity, the
greater the change in bond price for a
given change in the market required rate
of return.
69
Bond Price-Yield
Relationship
Coupon Rate
MARKET REQUIRED RATE OF RETURN (%)
B
O
N
D

P
R
I
C
E

(
$
)

1000
Par
1600
1400
1200
600
0
0 2 4 6 8 10 12 14 16 18
15 Year
5 Year
70
Bond Maturity ( Ms Excel Approach)
Coupon Rate = 10%
Present Value Calculations (PVIF) for "M.V."
Future Value 1000.00
Years 5
YTM (k
d
) 8.00%
Present Value $680.58
Present Value of an Annuity for "INTEREST"
Future Value $1,000.00
Coupon Rate 10%
Payment $100.00
YTM (k
d
) 8.00%
Number of Payments 5
Present Value $399.27
VALUE $1,079.85
5-YEAR MATURITY
71
Bond Maturity ( Ms Excel Approach)
Coupon Rate = 10%
Present Value Calculations (PVIF) for "M.V."
Future Value 1000.00
Years 15
YTM (k
d
) 8.00%
Present Value $315.24
Present Value of an Annuity for "INTEREST"
Future Value $1,000.00
Coupon Rate 10%
Payment $100.00
YTM (k
d
) 8.00%
Number of Payments 15
Present Value $855.95
VALUE $1,171.19
15-YEAR MATURITY
72
The Role of Bond Maturity
The 5-year bond price has risen from
$1,000 to $1,080 for the 5-year bond
(+8.0%).
The 15-year bond price has risen from
$1,000 to $1,171 (+17.1%). Twice as fast!
The required rate of return on both the
5- and 15-year, 10% coupon-paying
bonds has fallen from 10% to 8%.
73
The Role of the
Coupon Rate
For a given change in the
market required rate of return,
the price of a bond will change
by proportionally more, the
lower the coupon rate.

74
Example of the Role of
the Coupon Rate
Assume that the market required rate
of return on two equally risky 15-year
bonds is 10%. The coupon rate for
Bond H is 10% and Bond L is 8%.
What is the rate of change in each of
the bond prices if market required
rates fall to 8%?
75
Example of the Role of the
Coupon Rate
The price for Bond H will rise from $1,000
to $1,171 (+17.1%).
The price for Bond L will rise from $848 to
$1,000 (+17.9%). It rises faster!
The price on Bonds H and L prior to the
change in the market required rate of
return is $1,000 and $848, respectively.
76
Lower Coupon Rate ( Ms Excel Approach)
Present Value Calculations (PVIF) for "M.V."
Future Value 1000.00
Years 15
YTM (k
d
) 10.00%
Present Value $239.39
Present Value of an Annuity for "INTEREST"
Future Value $1,000.00
Coupon Rate 10%
Payment $100.00
YTM (k
d
) 10.00%
Number of Payments 15
Present Value $760.61
VALUE $1,000.00
BOND H (COUPON RATE = 10%)
77
Lower Coupon Rate ( Ms Excel Approach)
Present Value Calculations (PVIF) for "M.V."
Future Value 1000.00
Years 15
YTM (k
d
) 10.00%
Present Value $239.39
Present Value of an Annuity for "INTEREST"
Future Value $1,000.00
Coupon Rate 8%
Payment $80.00
YTM (k
d
) 10.00%
Number of Payments 15
Present Value $608.49
VALUE $847.88
BOND L (COUPON RATE = 8%)
78
Determining the Yield on
Preferred Stock
Determine the yield for preferred
stock with an infinite life.
P
0
= Div
P
/ k
P


Solving for k
P
such that
k
P
= Div
P
/ P
0


Recall
from
slide #
26

79
Preferred Stock Yield
Example
k
P
= $10 / $100.
k
P
= 10%.
Assume that the annual dividend on
each share of preferred stock is $10.
Each share of preferred stock is
currently trading at $100. What is
the yield on preferred stock?
80
Determining the Yield on
Common Stock
Assume the constant growth model
is appropriate. Determine the yield
on the common stock.
P
0
= D
1
/ ( k
e
- g )

Solving for k
e
such that
k
e
= ( D
1
/ P
0
) + g


Recall
from
slide #
34

81
Common Stock
Yield Example
k
e
= ( $3 / $30 ) + 5%
k
e
= 15%
Assume that the expected dividend
(D
1
) on each share of common stock
is $3. Each share of common stock
is currently trading at $30 and has an
expected growth rate of 5%. What is
the yield on common stock?
82
End of Chapter