WALL STREET WEST WORKSHOP

Oct/Nov 2009

OUTLINE

Introduction

Sources of Data

Stock valuation

Cost of Capital

TERMINOLOGY Investment Primary market Secondary market Value Income Capital Gain Return Rate of return Risk Speculation Marketability vs. Liquidity

SOURCES OF DATA

Thomson Reuters

Bloomberg

Worldwide Web

STOCK VALUATION

PV of all future dividends

1

1

10

10

)1(

)1(

)1(

)1(

n

nn

tt

t

tt

t

rgr

gD

r

DP

r

DP

o Capital Asset Pricing Model

)( fmifi RRRR

STOCK VALUATION - KEY INPUTS

Return Beta Risk Free Rate Market Risk Premium

Dividends EPS Payout ratio

Assumptions Goal Seek Problems

WEIGHTED AVERAGE COST OF CAPITAL

The minimum rate of return that must be earned from investments to ensure the value of the firm does not decrease

sspspsdd kwkwTkwWACC )1(

WEIGHTED AVERAGE COST OF CAPITAL - COMPONENTS After-tax cost of debt (kd(1-T))

Interest rate on debt less the tax savings

Cost should be based on new debt issued rather than existing debt

Cost of preferred stock (kps)

N

psps P

Dk

NOTE: PN is the price received after deducting flotation costs

WEIGHTED AVERAGE COST OF CAPITAL - COMPONENTS Cost of equity (ks)

Opportunity cost Alternative measures:

Risk-free rate plus risk premiumCAPMBond yield plus risk premiumDiscounted cash flow

gP

Dk

gk

DP

s

s

0

1

1

0