See attached assignment instructions
INSTRUCTIONS: ADD BEAUTIFUL COVER PAGE Similarity report should be less than 10% See the Purdue Owl link to proper use of APA https://owl.purdue.edu/owl/research_and_citation/apa_style/apa_style_introduction.html Write a 4 page paper (1,200 or more words) in APA format. Below is a recommended outline. 1. Cover page (See APA Sample papers in www.apastyle.org OR https://owl.english.purdue.edu/owl/resource/560/01/) 2. Introduction a. A thesis statement b. Purpose of paper c. Overview of paper 3. Body (Cite sources with in-text citations.) 4. Conclusion – Summary of main points plus Lessons Learned and Recommendations 5. References – List the references you cited in the text of your paper according to APA format. (Note: Do not include references that are not cited in the text of your paper) Support all assertions with proper scholarly research, using at least 5 references (scholarly articles published in peer-reviewed academic journals). Proper APA formatting is expected (cited sources, cover page, reference page, etc.). Your submission should be presented in the form of a business document. Presentation counts! Research Paper 1: Find the most recent Annual Report/10-K Report for Roku, Inc.. Submit a two-page double spaced paper summarizing the nature and performance of that company. Use information from the most recent 10K Report. Briefly discuss the nature of the company including history, main lines of business, financial performance overview and ratios (revenue growth, profitability, liquidity, asset efficiency, working capital, interest coverage, leverage, and operating returns), controls, risks, and ethics issues as discussed in Chapter 2 and Chapter 7 of the text. Submit a two-page double spaced paper summarizing for your boss your analysis including brief summary exhibits explaining your analysis and supporting your recommendation. Would you recommend investing in the company? Why or why not? Fundamentals of Corporate Finance, Fourth Edition Fundamentals of Corporate Finance Fourth Edition Chapter 7 Stock Valuation Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available) 1 Chapter Outline 7.1 Stock Basics 7.2 The Mechanics of Stock Trades 7.3 The Dividend-Discount Model 7.4 Estimating Dividends in the Dividend-Discount Model 7.5 Limitations of the Dividend-Discount Model 7.6 Share Repurchases and the Total Payout Model 7.7 Putting It All Together Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Learning Objectives Understand the tradeoff between dividends and growth in stock valuation Appreciate the limitations of valuing a stock based on expected dividends Value a stock as the present value of the company’s total payout Describe the basics of common stock, preferred stock, and stock quotes Compare how trades are executed on the NYSE and NASDAQ Value a stock as the present value of its expected future dividends Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.1 Stock Basics (1 of 3) Stock Market Reporting: Stock Quotes Common Stock Ticker Symbol Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Figure 7.1 Stock Price Quote for Nike (NKE) This screenshot from Google Finance shows the basic stock price information and price history charting for the common stock of Nike. The historical price chart covers the period mid-February through late June 2013. The price of $60.39 is for June 25, 2013. Source : www.google.com/finance?q=nke. Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.1 Stock Basics (2 of 3) Common Stock Shareholder Voting Straight Voting Cumulative Voting Classes of Stock Shareholder Rights Annual Meeting Proxy Proxy Contest Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.1 Stock Basics (3 of 3) Preferred Stock Cumulative versus Non-Cumulative Preferred Stock Preferred Stock: Equity or Debt? Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.2 The Mechanics of Stock Trades Market Order Limit Order Round Lot Super Display Book System Floor Broker Dealer Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.3 The Dividend-Discount Model (1 of 8) A One Year Investor Two potential sources of cash flows from owning a stock: Dividends Selling Shares Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.3 The Dividend-Discount Model (2 of 8) A One Year Investor Since the cash flows are not risk-less, they must be discounted at the equity cost of capital Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.3 The Dividend-Discount Model (3 of 8) Dividend Yields, Capital Gains, and Total Returns Dividend Yield Capital Gain Capital Gains Rate Total Return Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.3 The Dividend-Discount Model (4 of 8) Dividend Yields, Capital Gains, and Total Returns The expected total return of the stock should equal the expected return of other investments available in the market with equivalent risk Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Example 7.1 Stock Prices and Returns (1 of 4) Problem Suppose you expect Longs Drug Stores to pay an annual dividend of $0.56 per share in the coming year and to trade for $45.50 per share at the end of the year. If investments with equivalent risk to Longs’ stock have an expected return of 6.80%, what is the most you would pay today for Longs’ stock? What dividend yield and capital gain rate would you expect at this price? Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Example 7.1 Stock Prices and Returns (2 of 4) Solution Plan We can use Eq. 7.1 to solve for the beginning price we would pay now (P0) given our expectations about dividends (Div1 = $0.56) and future price (P1 = $45.50) and the return we need to expect to earn to be willing to invest (rE = 0.068). We can then use Eq. 7.2 to calculate the dividend yield and capital gain rate. Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Example 7.1 Stock Prices and Returns (3 of 4) Execute Using Eq. 7.1, we have Referring to Eq. 7.2, we see that at this price, Longs’ dividend yield is The expected capital gain is $45.50 − $43.13 = $2.37 per share, for a capital gain rate of Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Example 7.1 Stock Prices and Returns (4 of 4) Evaluate At a price of $43.13, Longs’ expected total return is 1.30% + 5.50% = 6.80%, which is equal to its equity cost of capital (the return being paid by investments with equivalent risk to Longs’). This amount is the most we would be willing to pay for Longs’ stock. If we paid more, our expected return would be less than 6.8% and we would rather invest elsewhere. Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Example 7.1a Stock Prices and Returns (1 of 4) Problem: Suppose you expect Koch Industries to pay an annual dividend of $2.31 per share in the coming year and to trade $82.75 per share at the end of the year. If investments with equivalent risk to Koch’s stock have an expected return of 8.9%, what is the most you would pay today for Koch’s stock? What dividend yield and capital gain rate would you expect at this price? Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Example 7.1a Stock Prices and Returns (2 of 4) Solution: Plan: We can use Eq. 7.1 to solve for the beginning price we would pay now (P0) given our expectations about dividends (Div1=$2.31) and future price (P1=$82.75) and the return we need to expect to earn to be willing to invest (rE=0.089). We can then use Eq. 7.2 to calculate the dividend yield and capital gain. Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Example 7.1a Stock Prices and Returns (3 of 4) Execute: Referring to Eq. 7.2 we see that at this price, Koch’s dividend yield is The expected capital gain is $82.75 − $78.11 = $4.64 per share, for a capital gain rate of Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. Example 7.1a Stock Prices and Returns (4 of 4) Evaluate: At a price of $78.11, Koch’s expected total return is 2.96% + 5.94% = 8.90%, which is equal to its equity cost of capital (the return being paid by investments with equivalent risk to Koch’s). This amount is the most we would be willing to pay for Koch’s stock. If we paid more, our expected return would be less than 8.9% and we would rather invest elsewhere. Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.3 The Dividend-Discount Model (5 of 8) A Multiyear Investor Suppose we planned to hold the stock for two years Then we would receive dividends in both year 1 and year 2 before selling the stock, as shown in the following timeline: Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.3 The Dividend-Discount Model (6 of 8) A Multiyear Investor The formula for the stock price for a two-year investor is the same as that for a sequence of two one-year investments Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.3 The Dividend-Discount Model (7 of 8) Dividend-Discount Model Equation The price of the stock is equal to the present value of all of the expected future dividends it will pay, along with the cash flow from the sale in year N Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.3 The Dividend-Discount Model (8 of 8) Dividend-Discount Model Equation Alternatively, rather than having a stopping point where we sell the shares, we can rewrite the equation to show that the dividends go on into the future Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved. 7.4 Estimating Dividends in the Dividend-Discount Model (1 of 7) Constant Dividend Growth Assumes that dividends will grow at a constant rate, g, forever The value of the firm depends on the dividend level of next year, divided by the equity cost of capital adjusted