Valuing Stocks

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MBA Corporate Finance Class Of 2014
V. Stock and Company Valuation

Ian Garrett

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Some Terminology
• Dividend – periodic cash distribution of (part of) profits from the company to its shareholdersa • Earnings Per Share (EP S) – profit divided by the number of shares outstanding • Payout Ratio – the fraction of earnings paid out • P/E Ratio – current share price divided by annual earnings per share: the multiple of earnings at which the stock currently sells can take other forms besides cash (e.g. stock dividends), and many firms make cash distributions to shareholders via share repurchases. a Dividends

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A Quick Look At Dividends In Practice
BT Financial Summary

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3-1 From the BT Annual Report and Form 20-F, 2008 and 2005:

Years ended 31 March In £m unless otherwise stated Basic earnings per share Dividends per share 2008 21.7p 15.8p 2007 34.4p 15.1p 2006 18.4p 11.9p 2005 21.4p 10.4p 2004 16.4p 8.5p 2003 31.4p 6.5p

' What Useful Information Could We Get From This?
1. The Payout Ratio Payout Ratio = As a percentage: ( Payout Ratio (%) = 2. Dividend Growth from t − 1 to t Dividend Growth = As a percentage: ( Dividend Growth (%) = Dividendt − Dividendt−1 Dividendt−1 ) × 100 Dividendt − Dividendt−1 Dividendt−1 Dividend Per Share Earnings Per Share ) × 100 Dividend Per Share Earnings Per Share

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Years ended 31 March In £m unless otherwise stated Basic earnings per share Dividends per share Payout Ratio Dividend Growth 2008 21.7p 15.8p 72.8% 4.6% 2007 34.4p 15.1p 43.9% 26.9% 2006 18.4p 11.9p 64.7% 14.4% 2005 21.4p 10.4p 48.6% 22.3% 2004 16.4p 8.5p 51.8% 30.8% 2003 31.4p 6.5p 20.7%

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Valuing Stocks
• Apply the discounted cash flow principle to the cash flows shareholders receive • If an investor buys and holds shares, the cash flow they receive is from two sources – any dividend the company pays – any capital gain should the investor