金融市场英文教学课件：Chapter 11 The Stock Market.docx

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1、Chapter 11The Stock MarketInvesting in StocksCommon Stock Versus Preferred StockHow Stocks are SoldComputing the Price of a Common StockMini-Case: NASDAQ: Fighting for its Life Against ECNsThe One-Period ValuationThe Generalized Dividend ModelThe Gordon Growth ModelPrice Earnings Valuation MethodHow

2、 the Market Sets Security PricesErrors in ValuationProblems with Estimating GrowthProblems with Estimating RiskProblems with Forecasting DividendsCase: The September 11 Terrorist Attack, the Enron Scandal, and the Stock MarketStock Market IndexesMini Case: History of the Dow Jones Industrial Average

3、Buying Foreign StockRegulation of the Stock MarketThe Securities and Exchange CommissionOverview and Teaching TipsBecause the market fbr stocks is of such great interest to students, this chapter has been expanded over previous editions. It discusses theories of how stocks are priced and how informa

4、tion is incorporated into stock prices. Laying out the simple models of the one-period valuation model, the generalized dividend model, the Gordon model and the P/E Valuation Method give students the tools to understand how stock prices are determined. However, stock market valuation is by no means

5、simple and this is emphasized to the students in the section on errors in valuation which outlines why it is so tricky to use these simple models.Begin this chapter by defining equity and show the difference between stocks which represent ownership and bonds which represent no ownership of the compa

6、ny. Investors receive a return on their investment in one of two ways: (1) price of stock rises or (2) firms issue stockholder dividends. Stock is either common stock or preferred stock. With the increase of international trading, investors have gone to other countries to buy securities. This is a g

7、rowing market to the U.S.Trading of the capital securities will occur in two types of exchanges: organized exchanges and over-the- counter exchanges. Popular organized exchanges arc the New York Stock Exchange, also the largest, the American Stock Exchange, and the London Stock Exchange.This chapter

8、 contains extensive discussion of stock valuation. This provides an excellent opportunity to discuss the efficient market hypothesis presented in chapter 6.Students should be instructed on the strengths and weaknesses of the stock indexes as well as the role of the SEC in their regulation. Answers t

9、o End-of-Chapter QuestionsThe value of any asset is the present value of its fiiture cash flows. The value of a bond is the PV of the interests payments plus the PV of the final payment. Stocks are valued the same way. The price is the PV of the cash flows that stock is expected to generate for the

10、investor.1. There are two cash flows from stock, periodic dividends, and a future sales price. Dividends are frequently changed when firm eamings either rise or fall. The future sales price is also difficult to estimate, since it depends on the dividends that will be paid at some date even farther i

11、n the future. Bond cash flows also consist of two parts, periodic interest payments and a final maturity payment. These payments are established in writing at the time the bonds are issued and cannot be changed without the firm defaulting and being subject to bankruptcy. Stock prices tend to be more

12、 volatile, since their cash flows are more subject to change.2. Organized exchanges have a physical building where business is conducted. They generally have a governing board that establishes rules fbr trading. The organized exchanges tend to have larger firms listed on them than trade over the cou

13、nter.3. NASDAQ is a computer network that allows traders to monitor stocks traded on the over-the-counter market. It provides current bid and ask prices on about 4000 actively traded securities.4. Stocks do not mature, do not pay a fixed amount every period, and often give holders the right to vote

14、on management issues.5. At least 7 of the 30 firms are involved in high-technology products or services. This has increased the volatility of the Dow index in recent years as these firms were added. Quantitative ProblemsEbay, Inc. went public in September of 1998. The following information on shares

15、 outstanding was listed in the final prospectus filed with the SEC1.In the IPO, the Ebay issued 3,500,000 new shares. The initial price to the public was $18.00 per share.The final first-day closing price was $44.88.1. If the investment bankers retained S 1.26 per share as fees, what was the net pro

16、ceeds to Ebay? What was the market capitalization of new shares of Ebay?Solution: Net Proceeds to Ebay = (18.00 - 1.26) x 3,500,000 = $58,590,000.00Market C叩=44.88 x 3,500,000 = 157,080,000This information is summarized from Two common statistics in IPOs arc underpricing and money left on the table.

17、 Underpricing is defined as percentage change between the offering price and the first day closing price. Money left on the table is the difference between the first day closing price and the offering price, multiplied by the number of shares offered. Calculated the underpricing and money left on th

18、e table fbr Ebay. What docs this suggest about the efficiency of the IPO process?Solution: Underpricing = (44.88 - 18.00)/18.00)= 149.33%MLOT = (44.88 - 18.00) x 3,500,000 = S94,080,0002. The shares of Misheak, Inc. are expected to generated the following possible returns over the next 12 months:Ret

19、urnProbability-5%0.105%0.2510%0.3015%0.2525%0.10If the stock is currently trading at S25/share, what is the expected price in one year. Assume that the stock pays no dividends.Solution: The expected return over the next 12 months is calculated as:-0.05 x 0.10 + 0.05 x 0.25+ 0.10x0.30 + 0.15 x 0.25 +

20、 0.25 x 0.10 = 0.10This suggests that the expected price is S25 x (1.10) = S27.503. Suppose Soft People, Inc. is selling at $19.00 and currently pays an annual dividend of SO.65 per share. Analysts project that the stock will be priced around $23.00 in one year. What is the expected return?Solution:

21、 J 23.00 + 0.65-19.00 Expected return = 24.47%19.004. Suppose Microsoft, Inc. was trading at $27.29 per share. At that time, It pays an annual dividend of $0.32 per share, and analysts have set a I -year target price around $33.30 per share. What is the expected return on this stock?Solution:二 ，”Exp

22、ected return = 0.2319 = 23.2%27.295. LaserAce is selling at $22.00 per share. The most recent annual dividend paid was $0.80. Using the Gordon Growth model, if the market requires a return of 11%, what is the expected dividend growth rate fbr LascrAccr?Solution:+ or 22.00 J 黑g). Solving, g = 7.1 %OH

23、-g6. Huskic Motors just paid an annual dividend of $ 1.00 per share. Management has promised shareholders to increase dividends a constant rate of 5%. if the required return is 12%, what is the current price per share?Solution:P 2(l+g)ke-S100(1+0.05)= 13 .UU7. Suppose Microsoft, Inc. is trading at S

24、27.29 per share. It pays an annual dividend of SO.32 per share, which is double its last years dividend of SO. 16 per share. If this trend is expected to continue, what is the required return on Microsoft?Solution:JoO+g) 27.29 = 032(1 + 1) or 左 102%. ke-This seems a bit high. Perhaps investors dont

25、believe this trend will continue forever, or this isnt the correct valuation model fbr Microsoft!8. Gordon & Co/s stock has just paid its annual dividend $1.10 per share. Analysts believe that Gordon will maintain its historic dividend growth rate of 3%. If the required return is 8%, what is the exp

26、ected price of the stock next year?Solution:Macro Systems just paid an annual dividend of $0.32 per share. Its dividend is expected to double Ibr the next four years (Z)i throughafter which it will grow at a more modest pace of 1% per year. If the required return is 13%, what is the current price?So

27、lution:0.64 1.282.565.12 5.12(1+0.01)1而+ 1.132 41.133 .1.134 + 0.13-0.01 1.1349. Nat-T-Cat Industries just went public. As a growing firm, it is not expected to pay a dividend fbr the first five years. After that, investors expect Nat-T-Cat to pay an annual dividend $1.00 per share (i.e., D(、= 1.00)

28、, with no growth. If the required return is 10%, what is the current stock price?Solution:好爸詈黑喘0。soPo = P5/(1.1O)5 = $6.2110. Analysts are projecting that CB Railways will have earnings per share of S3.90. If the average industry ratio is about 25, what is the current price of CB Railways?Solution:P

29、rice = 3.90 x 25 = $97.5011. Suppose Microsoft, Inc. reported earnings per share around $0.75. If Microsoft is in an industry with a ratio ranging from 30 to 40, what is a reasonable price range fbr Microsoft?Solution: Microsofts price should be between $0.75 x 30 to SO.75 x 40, or $22.50 to $30.00.

30、12. Consider the following security information fbr 4 securities making up an index:Security*PriceSharesOutstandingtime = 0time = 1181320 inillion2222550 million33530120 million4505575 inillionWhat is the change in the value of the index from time = 0 to time = 1 if the index is calculated using a v

31、alue-weighted arithmetic mean?Solution: For a value-weighted arithmetic mean, the change is calculated as follows: First, the market value at time = 0 is calculated as:SecurityVPrice_ SharesOutstandingMarket Valuetime =0time = 1181320 million$ 1602222550 inillion$1,10033530120 million$4,2004505575 i

32、nillion$3,750$9,210The change is then calculated as:13-816025-22110030-35420055-503750八八八%x+x+x+x = 0.0027Indexi = Indexo x 1.0027An index had an average (geometric) mean return over 20 years of 3.8861%. If the beginning index value was 100, what was the final index value after 20 years?Solution: Th

33、e actual return over the 20 years is (1.038861)20 = 2.143625So, the final index value is 214.362513. Compute the price of a share of stock that pays a $ 1 per year dividend and that you expect to be able to sell in one year for $20、assuming you require a 15% return.Solution:$1/(1 +0.51) + S20/(l +0.

34、15) = $18.2614. The projected earnings per share fbr Risky Ventures, Inc. is $3.50. The average PE ratio fbr the industry composed of Risky Ventures closest competitors is 21. After careful analysis, you decide that Risky Ventures is a little more risky than average, so you decide a PE ratio of 23 better reflects the markets perception of the firm. Estimate the current price of the firms stock.Solution:23 x $3.5 = $80.50.