Banking Chapter 9 Valuing Stocks Outline The Following Outline Correlated The Powerpoint

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Chapter 9

Valuing Stocks

I. Chapter Outline

The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides

are referenced in bold. Alternative Examples to selected textbook examples are also available in the

PowerPoint Lecture Slides and are also referenced in bold.

9.1 The Dividend-Discount Model (Slide 9)

• A One-Year Investor (Slides 9–10)

• Dividend Yields, Capital Gains, and Total Returns (Slide 11)

• Example 9.1 Stock Prices and Returns (Slides 12–13)

• PowerPoint Alternative Example 9.1 (Slides 14–15)

• A Multiyear Investor (Slide 16)

• The Dividend-Discount Model Equation (Slides 17–18)

9.2 Applying the Dividend-Discount Model (Slide 19)

• Constant Dividend Growth (Slides 19–20)

• Example 9.2 Valuing a Firm with Constant Dividend Growth (Slides 21–22)

• PowerPoint Alternative Example 9.2 (Slides 23–24)

• Dividends Versus Investment and Growth (Slides 25–30)

– A Simple Model of Growth (Slides 25-29)

– Profitable Growth (Slide 30)

9.3 Total Payout and Free Cash Flow Valuation Models (Slide 44)

• Share Repurchases and the Total Payout Model (Slides 44–46)

• Example 9.6 Valuation with Share Repurchases (Slides 47–48)

• PowerPoint Alternative Example 9.6 (Slides 49–50)

• The Discounted Free Cash Flow Model (Slides 51–54, 60)

– Valuing the Enterprise (Slide 52)

– Implementing the Model (Slides 53–54)

• Example 9.7 Valuing Kenneth Cole Using Free Cash Flow (Slides 55–56)

• PowerPoint Alternative Example 9.7 (Slides 57–59)

– Connection to Capital Budgeting (Slide 60)

36 Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition

• Example 9.8 Sensitivity Analysis for Stock Valuation (Slides 61–62)

• Figure 9.1 A Comparison of Discounted Cash Flow Models of Stock Valuation (Slide 63)

9.4 Valuation Based on Comparable Firms (Slide 64)

• Valuation Multiples (Slides 65–67, 72, 77)

– The Price-Earnings Ratio (Slides 65–67)

• Example 9.9 Valuation Using the Price-Earnings Ratio (Slides 68–69)

• PowerPoint Alternative Example 9.9 (Slides 70–71)

– Enterprise Value Multiples (Slide 72)

• Example 9.10 Valuation Using an Enterprise Value Multiple (Slides 73–74)

• PowerPoint Alternative Example 9.10 (Slides 75–76)

– Other Multiples (Slide 77)

• Limitations of Multiples (Slide 78)

• Comparison with Discounted Cash Flow Methods (Slide 79)

• Table 9.1 Stock Prices and Multiples for the Footwear Industry, January 2006 (Slide 80)

• Stock Valuation Techniques: The Final Word (Slide 81)

• Figure 9.2 Range of Valuation Methods for KCP Stock Using alternative Valuation Methods

(Slide 82)

• Interview with Douglas Kehring

9.5 Information, Competition, and Stock Prices (Slide 83)

• Figure 9.3 The Valuation Triad (Slide 84)

• Information in Stock Prices (Slide 85)

• Example 9.11 Using the Information in Market Prices (Slides 86–87)

• PowerPoint Alternative Example 9.11 (Slides 88–90)

• Competition and Efficient Markets (Slides 91-92, 95-96)

– Public, Easily Interpretable Information (Slide 92)

• Example 9.12 Stock Price Reactions to Public Information (Slides 93–94)

– Private or Difficult-to-Interpret Information (Slides 95–96)

• Example 9.13 Stock Price Reactions to Private Information (Slides 97–98)

II. Learning Objectives

9-2 Calculate the total return of a stock, given the dividend payment, the current price, and the

previous price.

9-4 Discuss the determinants of future dividends and growth rate in dividends, and the sensitivity of

9-6 Describe circumstances in which cutting the firm’s dividend will raise the stock price.

9-9 Use the discounted free cash flow model to calculate the value of stock in a company with

leverage.

9-11 Explain why several valuation models are required to value a stock.

9-13 Discuss why investors who identify positive-NPV trades should be skeptical about their

9-14 Assess the impact of stock valuation on recommended managerial actions.

III. Chapter Overview

This chapter shows how to use the Law of One Price to compute the value of a stock. The chapter

begins by discussing the dividend-discount model. Next, they use tools learned in Chapter 8 to value

9.1 The Dividend-Discount Model

The authors begin by showing that a one-period investor will be willing to pay the same price as a

9.2 Applying the Dividend-Discount Model

The section begins with the assumption that dividends will grow at a constant rate. The constant

(2) increase payout ratio, and (3) decrease shares outstanding. Suppose the number of shares

outstanding is fixed. The authors show that in this case, the earnings growth rate = retention rate ×

return on new investment. See equations 9.8 through 9.12 for the development of this relationship.

Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition 39

IV. Spreadsheet Solutions in Excel