Essay About E0        R And D1

Finance Review
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Final Review ClassFoundations of FinanceOverviewFor first half of semester, see review class recording onlineToday:Go through key points of second part of courseNot exhaustiveDo a few sample questionsAnswer any questions you may have.OutlineBalance sheet valuation conceptsBackward looking, easy to manipulateFundamental value / intrinsic valueDividend Discount Model (DDM)Zero dividend growthConstant dividend growth• = Gordon Growth ModelValuation ratiosTwo-stage dividend growth3DDM Case 2: constant dividend growthGordon’s Growth Model (GGM)Suppose that expected dividends grow at a rate g, that is,E(D1 ) =(1+g)D0, E(D2 ) =(1+g)2D0, etc.Use the Dividend-Discount Model:V0  =E(D1 ) +1+ R[pic 1]E(D2 )(1+ R)2[pic 2]+        E(D3 )(1+ R)3[pic 3]2[pic 4]+ 3= D0 (1+ g) +[pic 5]D0 (1+ g)+ D0 (1+ g)+1+ R[pic 6](1+ R)2(1+ R)3= D0 (1+ g) =[pic 7][pic 8]E(D1 )R − gR − gAssumption: R > G4Using GGM to study Valuation RatiosPrice-dividend ratio. If GGM applies then:P0        =  1+ g        [pic 9][pic 10]D0Price-earnings ratio.R − gHow much do you have to pay for every dollar of earnings generated?How do we go between dividends and earnings?D0=(1-b)E0   with “earnings retention ratio” – “plowback ratio”of b.Inverse of the “dividend payout ratio”P0        = (1+ g)(1−b)[pic 11]E0        R− g5Other things discussedHow to go from stock prices to implied expected growth rate.Microsoft vs. Apple exercise in classTwitter IPO exampleWhen should firms pay out dividends?Apple dividend battleBond PricingFixed IncomeForward Rate / Yield CurveDuration/ImmunizationYield to Maturity (YTM) on Annual-Pay Coupon Bonds-Po        c        c………F + c[pic 12]Multiple payment security0        1        2        TFor an annual-pay coupon bond, the YTM iscalculated as the Internal Rate of Return.Hence, YTM is the rate that solves:[pic 13]8Yield to Maturity onSemi-Annual-Pay Coupon BondsFor a semi-annual-pay coupon bond, theYTM is computed in 2 steps:Find the semi-annual IRR, that is, the rate rthat solves:P0= ∑ _        Ct _        FTt =1[pic 14](1+r)t(1+r)TThe YTM is the corresponding annual percentage rate (APR):        YTM = 2 rThe corresponding effective annual yieldis (1+YTM /2 )2 –19Example: YTM on aSemi-Annual-Pay Coupon BondSuppose that a 3-year bond has a face value of 1000 and pays semi-annual coupons of 40. If the price is 900 then what is the YTM?[pic 15][pic 16][pic 17][pic 18][pic 19][pic 20][pic 21]-90040404040401040t=0t=1t=2t=3Step 1 use calculator to find that r = 6.036% solves:900 = _        40        (1+ r )1+ + _        40        (1+ r )5+  1040        (1+ r )6•        Step 2: YTM = 2r = 12.072%