Menejemen Keuangan II/ M 1Minggu II Page *MINGGU 2MANAJEMEN KEUANGAN IIPokok Bahasan:

Stock Valuation

Tujuan Instruksional Khusus:

Agar mahasiswa dapat mengerti dan memahami stock valuation

Referensi:

1.Gitman, Lawrence J., (2011), Principles of Managerial Finance, 10th ed., Addison-Wesley Word Student. (Chap 7)2.Bearley & Myers, (2003), Principles of Corporate Finance, 7th ed. Mcraw Hill Inc.

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Menejemen Keuangan II/ M 1Minggu II Page *Chapter 7

Stock Valuation

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Menejemen Keuangan II/ M 1Minggu II Page *Differences Between Debt & Equity

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Menejemen Keuangan II/ M 1Minggu II Page *Preferred StockPreferred stock is an equity instrument that usually pays a fixed dividend and has a prior claim on the firms earnings and assets in case of liquidation.The dividend is expressed as either a dollar amount or as a percentage of its par value. Therefore, unlike common stock a preferred stocks par value may have real significance.If a firm fails to pay a preferred stock dividend, the dividend is said to be in arrears.

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Menejemen Keuangan II/ M 1Minggu II Page *In general, and arrearage must be paid before common stockholders receive a dividend.Preferred stocks which possess this characteristic are called cumulative preferred stocks.Preferred stocks are also often referred to as hybrid securities because they possess the characteristics of both common stocks and bonds.Preferred stocks are like common stock because they are perpetual securities with no maturity date.Preferred Stock

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Menejemen Keuangan II/ M 1Minggu II Page *Initial financing for most firms typically comes from a firms original founders in the form of a common stock investment.Early stage debt or equity investors are unlikely to make an investment in a firm unless the founders also have a personal stake in the business.Initial non-founder financing usually comes first from private equity investors.After establishing itself, a firm will often go public by issuing shares of stock to a much broader group.Issuing Common Stock

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Menejemen Keuangan II/ M 1Minggu II Page *Going PublicWhen a firm wishes to sell its stock in the primary market, it has three alternatives.A public offering or IPO, in which it offers its shares for sale to the general public (our focus).A rights offering, in which new shares are sold to existing shareholders.A private placement, in which the firm sells new securities directly to an investor or a group of investors.

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Menejemen Keuangan II/ M 1Minggu II Page *IPOsIPOs are typically made by small, fast-growing companies that either: require additional capital to continue expanding, or have met a milestone for going public that was established in a contract to obtain VC funding.The firm must obtain approval of current shareholders, and hire an investment bank to underwrite the offering.The investment banker is responsible for promoting the stock and selling its shares.

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Menejemen Keuangan II/ M 1Minggu II Page *The Investment Bankers RoleMost public offerings are made with the assistance of investment bankers which are financial intermediaries that specialize in selling new securities and advising firms with regard to major financial transactions.The main activity of the investment banker is underwriting, which involves the purchase of the security issue from the issuing company at an agreed-on price and bearing the risk of selling it to the public at a profit.

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Menejemen Keuangan II/ M 1Minggu II Page *Common Stock ValuationStockholders expect to be compensated for their investment in a firms shares through periodic dividends and capital gains.Investors purchase shares when they feel they are undervalued and sell them when they believe they are overvalued.

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Menejemen Keuangan II/ M 1Minggu II Page *Common Stock ValuationInvestors base their investment decisions on their perceptions of an assets risk.In competitive markets, the interaction of many buyers and sellers results in an equilibrium price the market value for each security.This price is reflective of all information available to market participants in making buy or sell investment decisions.Market Efficiency

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Menejemen Keuangan II/ M 1Minggu II Page *Common Stock ValuationThe process of market adjustment to new information can be viewed in terms of rates of return.Whenever investors find that the expected return is not equal to the required return, price adjustment will occur.If expected return is greater than required return, investors will buy and bid up price until new equilibrium price is reached. The opposite would occur if required return is greater than expected return.Market Adjustment to New Information

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Menejemen Keuangan II/ M 1Minggu II Page *Common Stock ValuationThe efficient market hypothesis, which is the basic theory describing the behavior of a perfect market specifically states:Securities are typically in equilibrium, meaning they are fairly priced and their expected returns equal their required returns. At any point in time, security prices full reflect all public information available about a firm and its securities and these prices react quickly to new information.Because stocks are fairly priced, investors need not waste time trying to find and capitalize on mis-priced securities.The Efficient Market Hypothesis

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Menejemen Keuangan II/ M 1Minggu II Page *Common Stock ValuationStock Returns are derived from both dividends and capital gains, where the capital gain results from the appreciation of the stocks market price.due to the growth in the firms earnings. Mathematically, the expected return may be expressed as follows:E(r) = D/P + gFor example, if the firms $1 dividend on a $25 stock is expected to grow at 7%, the expected return is:E(r) = 1/25 + .07 = 11%

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Menejemen Keuangan II/ M 1Minggu II Page *Stock Valuation ModelsThe Basic Stock Valuation Equation

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Menejemen Keuangan II/ M 1Minggu II Page *The zero dividend growth model assumes that the stock will pay the same dividend each year, year after year.Stock Valuation ModelsThe Zero Growth Model

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Menejemen Keuangan II/ M 1Minggu II Page *The constant dividend growth model assumes that the stock will pay dividends that grow at a constant rate each year -- year after year.Stock Valuation ModelsThe Constant Growth Model

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Menejemen Keuangan II/ M 1Minggu II Page *Free Cash Flow ModelStock Valuation ModelsThe free cash flow model is based on the same premise as the dividend valuation models except that we value the firms free cash flows rather than dividends.

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Menejemen Keuangan II/ M 1Minggu II Page *Free Cash Flow ModelStock Valuation ModelsThe free cash flow valuation model estimates the value of the entire company and uses the cost of capital as the discount rate.As a result, the value of the firms debt and preferred stock must be subtracted from the value of the company to estimate the value of equity.

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Menejemen Keuangan II/ M 1Minggu II Page *Free Cash Flow ModelStock Valuation ModelsStep 1: Calculate the present value of the free cash flow occurring from the end of 2009 to infinity, measured at the beginning of 2009.

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Menejemen Keuangan II/ M 1Minggu II Page *Other Approaches to Stock ValuationBook value per share is the amount per share that would be received if all the firms assets were sold for their exact book value and if the proceeds remaining after paying all liabilities were divided among common stockholders.This method lacks sophistication and its reliance on historical balance sheet data ignores the firms earnings potential and lacks any true relationship to the firms value in the marketplace.Book Value

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Menejemen Keuangan II/ M 1Minggu II Page *Other Approaches to Stock ValuationLiquidation value per share is the actual amount per share of common stock to be received if al of the firms assets were sold for their market values, liabilities were paid, and any remaining funds were divided among common stockholders.This measure is more realistic than book value because it is based on current market values of the firms assets.However, it still fails to consider the earning power of those assets.Liquidation Value

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Menejemen Keuangan II/ M 1Minggu II Page *Other Approaches to Stock ValuationSome stocks pay no dividends. Using P/E ratios are one way to evaluate a stock under these circumstances.The model may be written as:P = (m)(EPS)where m = the estimated P/E multiple.For example, if the estimated P/E is 15, and a stocks earnings are $5.00/share, the estimated value of the stock would be P = 15*5 = $75/share.Valuation Using P/E Ratios

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Menejemen Keuangan II/ M 1Minggu II Page *Determining the appropriate P/E ratio.Possible Solution: use the industry average P/E ratioDetermining the appropriate definition of earnings. Possible Solution: adjust EPS for extraordinary itemsDetermining estimated future earningsforecasting future earnings is extremely difficultOther Approaches to Stock ValuationWeaknesses of Using P/E Ratios

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Menejemen Keuangan II/ M 1Minggu II Page *Valuation equations measure the stock value at a point in time based on expected return and risk.Any decisions of the financial manager that affect these variables can cause the value of the firm to change as shown in the Figure below.Decision Making and Common Stock Value

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