Bond Valuation H5 Flashcards
What is the formula to calculate the present value of level coupon bonds
As it is an annuity in addition to the face value
C/r - C/(r * (1+r)^t) + F/(1+r)^t
Is the value of a stok the discount value of all future dividend payments or the price plus the next dividend payment
Both are true in a perfect market where all is known
Is the value of a stock price the same as the discounted value of all future dividend payments even in a short sighted market
Yes becouse they always need to find another investor to sell to, a line of short sighted investors end up a fairly öong time horizon
how do you calculate the present value of a zero growth company with certain dividend payments
Simple perpetuity formula Div/r
how do you calculate the present value of a company with constant growth and certain dividend payments
Growing perpituity formula Div/(r - g) where g is growth rate
how do you calculate the present value of a company with shifting growth and certain dividend payments
You split the expected growth rate stages and add their value as growing perpetuities
How is the growth rate calculated
return on investment * (retained earnings / total earnings) aka retention ratio.
Return on retained earnings or corporate investment is usually estimated to be historical ROE
True
Are estimates of dividend discount rate of return uncertain
Yep, they always have a high rate of error unsually
What is a cash cow company
A firm who give all earnings per share as dividends EPS = Div
When should a company retain earnings
When the investment has a higher net present value to the shareholders than giving that money as cash
How do you value a company based on growth opertunities
You need to net present value all the possible investments and compare it to if values are given as dividends
In a rational market what does a high P/E ratio mean
That there are large growth opertunities present
What does FCFF stand for
Free cashflow to the firm, it is used when valuing small firms that are purchased whole where a firm is worth the sum of all future cashflows
