Valuation of Long Term Securities (bonds and stocks)
邦保罗
What has Mickey Mouse got to do with this?
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In february 2004 Comcast put a hostile take over bid on
Disney
Comcast offered about $ 54 billion for Disney
Many professionals said the bid was far too low and
therefore could not be successful
Comcast claimed it offered a 10% premium for the
shareholders
But since it was a share for share deal Comcast paid for
it with its own shares
After the bid Disney shares raised 10% and Comcast
shares fell about 10% at that time the premium
evaporated and Comcast actually offered a price for
Disney at a discount…
The deal did not effectuate as you imagine
The board of Disney refused to accept it and the
shareholders of course also refused…
In the meantime a fight at the top was taking place
between the cousin of Walt Disney and the CEO Michael
Eisner…(see the picture)
Eisner won then but agreed to leave Disney per 2006 for
early retirement…goodbye Mr. Eisner…who saved
Disney when it was about to go bankrupt…
Bye bye Mr. Eisner…
Look at the valueline doc.
And the remainder
…(you can enlarge to read or download the doc.)
D
IS
N
E
Y
(W
A
L
T
)N
Y
S
E
D
IS
TIMELINESS
SAFETY
TECHNICAL
BETA
1.05
3
1
3
Lowered 4/29/11
Raised 2/13/09
Lowered 1/27/12
(1.00 = Market)
43.9
26.0
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2014 2015 2016
LEGENDS
12.0 x ²Cash Flow² p sh
. . . . Relative Price Strength
Options: Yes
Shaded areas indicate recessions
2
0
1
4
1
6
P
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G
a
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h
75
(+95%)
L
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w
60
(+55%)
Insider Decisions
R
E
C
E
N
T
P
R
IC
E
Disney today…
High:
Low:
A
n
n
’
lT
o
t
a
l
R
e
t
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n
19%
13%
120
100
80
64
48
32
24
20
16
12
M
AMJ JASON
0 0 0 0 0 1 0 0 1
2 0 0 0 2 0 1 2 2
3 0 0 0 3 0 1 2 2
% TOT. RETURN 1/12
Institutional Decisions
1
Q
2
0
1
1
2
Q
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1
1
3
Q
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0
1
1
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459
432
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541
547
557
H
l
d
’s
(
0
0
0
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127842812533801191116
1995
1996
1997
1998
Percent
shares
traded
1999
THIS
STOCK
12
8
4
2000
1
y
r
.
3
y
r
.
5
y
r
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2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
©
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The W
alt Disney Company is poised to
do well in the near term. Strong brands,
global growth efforts, and multiplatform
expansion seem to augur well. In all, we
look for share earnings to advance 15%
, on
a 5%top-line gain this year.
Filmed Entertainment ought to make
a rebound. The studio’s upcoming slate of
movies, the re-release of several of its
animated classics in 3D, and related merchandise sales should help it overcome
weakness from declining DVD sales. Plus,
the M
arvel integration ought to provide
this division with a much-needed boost.
Too, Disney plans to acquire Indian Broadcaster
and film studio, UTV Software
Communications.
Disney should continue to invest in its
Parks and Resorts. The lion’s share of
its budget is earmarked for the Shanghai
Disney Resort.
The
conglomerate
also
plans
to launch
Disney Fantasy this
spring, and is in the midst of discussions
with director James Cameron about the
design of an Avatar-themed land in Disney
W
orld. Overall, management plans to increase capital expenditures by nearly $500
million in fiscal 2012.
Things should begin to firm up at its
media networks. ESPN faced pressure at
the end of 2011, due to the NBAstrike and
elevated
programming
and
production
costs because of sports rights fees increases. New agreements with the NFL
(through 2021) should help boost totals at
the sports network. In addition, in early
January, Disney entered into a 10-year
distribution contract with Comcast. The
new carriage agreement expands its content reach, enabling Comcast’s X
finity TV
subscribers to watch ABC, ESPN, and Disney live or on demand. The deal also supports nontraditional platforms, such as
mobile devices, W
eb tablets, and the Internet. It also has other affiliate contracts up
for renewal in the next few months, and
ought to use upcoming negotiations to better monetize its multichannel content.
The
company
has
been
returning
value to its shareholders. In addition to
Disney’s ongoing stock-buyback program,
the board raised the annual dividend by
50%to $0.60 a share. W
hat’s more,
These top-quality shares offer wide
long-term appreciation potential.
Orly Seidman
February 10, 2012
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And has Disney bonds
outstanding?
Maturity
Current
Type
Issue
Price
Coupon(%)
YTM(%)
Yield(%)
Rating
Callable
Corp
DISNEY
WALT CO
105.99
6.75
30-Mar-06
2.602
6.369
BBB
No
Corp
DISNEY
WALT CO
MTNS BE
104.7
5.5
29-Dec-06
3.29
5.253
BBB
No
Corp
DISNEY
WALT CO
MTNS BE
105.39
5.375
01-Jun-07
3.235
5.1
BBB
No
Corp
DISNEY
WALT CO
MTNS BE
111.16
6.375
01-Mar-12
4.579
5.735
BBB
No
Corp
DISNEY
WALT CO
MTNS BE
110
6.2
20-Jun-14
4.893
5.637
BBB
No
Corp
DISNEY
WALT CO
MTNS BE
113.98
7
01-Mar-32
5.958
6.141
BBB
No
Valuation
• Liquidation value: Sell as separated
asset from ongoing operations (low)
for instance when a company is
bankrupt
• Book Value: Shareholders equity in
the balance sheet of a company
• Market Value: Share Price * number
of (common) shares outstanding
• Intrinsic Value: Long Term Free
Cash Flow/Cost of Capital
Valuation of Bonds
•
A Bond is a confession of debt paper
from the government or a company
•
Each Bond has :
–
–
–
–
•
A face value (say $ 1,000)
A Coupon rate (say 10% per year)
A maturity ( for example 9 years)
A cost of capital (return that the investor
wants for this specific paper (say 12%)
This is called the cost of debt (Kd)
Calculating the value of a bond means
calculating the cash flows that the bond
will generate over its life and
discounting at 12%
Put a value on mickey?
So the value is:
• V=$100/(1+12%)+$100/(1+12%)^2+…
+$100/(1+12%)^9+$1000/(1+12%)^9= $ 893.80 (discount: $
106.20)
• So an investor should pay not more then $ 893.80 to buy
this bond
• The bond is sold at a discount (lower then its face value
of $ 1000)
• Note that all the coupons are discounted at 12% and at
the end of the life time the amount of the “debt” ($ 1000)
will be paid back
But if Kd= 8% instead of 12%
• V=$100/(1+8%)+$100/(1+8%)^2+…
+$100/(1+8%)^9+$1000/(1+8%)^9= $ 1124.79 (premium $ 124.79)
• The bond is sold at a premium: So now the
bond has a value higher then its face
value…
Perpetual bonds
• Perpetual means that they will give coupon
income forever…
• If the coupon is 10% and Kd=12%
• The value of such a bond is:V= I/Kd with I=the
amount of the coupon
• Value= $100/12%= $ 833,33
• Perpetuity: V= $ Coupon/Kd%
Zero coupon bond
•
•
•
•
Some bonds do not pay a coupon
They simply mature after several years
What is the value of such a bond?
Say Kd=12% and maturity is 10 yrs.
• Value= $1000/(1+12%)^10= $ 322
• You should pay only pay $ 322 for such a bond
Most bonds issued in the US
• Pay coupon interest twice a year (semi annually)
– A 10% bond with half year coupons and 12 years
maturity with Kd=14% and a face value of $ 1000 can
be valued at:
– V=$50/(1+ 14%/2)^1 +50/(1+14%/2)^2+…..+…….
+$50/(1+14%/2)^24+$1000/(1+14%/2)^24= $ 770,45
Note that a bond valuation is…
• Vb= C1/(1+i)+ …..+Cn/(1+i)^n+P/(1+i)^n
• Vb= Coupon*Annuity (i,n) + Principal/(1+i)^n
Annuity(i,n)= (1- 1/(1+i)^n)/I
(see the Primer on Time Value of Money)
• Thus for 30 year bond with 60 coupon payments of $25 and
i=3% per half year:
• Vb=$25*(1-1/(1+3%)^60)/3% + $1000/(1.03)^60
• Growing Annuity(i,g,n)= $A*(1+g)*(1-((1+g)^n/(1+i)^n))/(i-g)
Inverse relationship
How to use Excel…
Change in Bond Price as a Function of YTM…
interest rate risk for investors in Bonds
We can observe:
• Bond prices and yields are inversely related
• An increase in a bond’s yield to maturity results in a smaller bond
price change than a decrease in yield (of equal magnitude)
• Prices of Long Term bonds tend to be more sensitive to interest rate
changes than Prices of short term bonds (compare bond A and B)
• The sensitivity of bond prices to changes in yields increases at a
decreasing rate as maturity increases (compare bond A and B)
• Interest rate risk is inversely related to a bond’s coupon rate (low
coupon bond prices are more sensitive for interest rate changes)
Preferred stock valuation
• Preferred stock offers preferred dividend
• A perpetual stream of fixed dividends
will make the valuation look like a
perpetual bond:
• Value= Dp (yearly amount of
dividends)/Kp ( the return the investor
wants on this preferred stock)
• So if the dividend is $ 9 per share of
$1000 and Kp= 14% then Value per
preferred share= Dp/Kp=$9/14%=$
64,29
• Note this is a Perpetuity!
The most important valuation is the
one for common stock
• If a share will be hold forever the value is the
DCF of all future dividends
• Assumed that the yearly dividends are the
same and that Ke= the return that an investor
wants on these common shares:
• Value per share=
D1/(1+Ke)+D2/(1+Ke)^2…+Dn/(1+Ke)^n
• So if D1=D2=D3=…=Dn= $10
• And Ke is 10% Value/share= $10/10%=$ 100
• However most likely Di is different …so this
becomes a growing Perpetuity
But in reality
• Companies pay different
dividends every year
• Shareholders hold shares for
a short time (not forever)
– In this case value/share is
(assume the shareholder hold
the shares 2 years :
– Value/share=D1/(1+Ke)+D2/(1+
Ke)^2+ P2/(1+Ke)^2 where P2=
the value of the share at the
end of the second year
Be bullish!
Dividend constant growth
• If dividend grows every year by
a certain % then D2=D1(1+g%)
where g% is the growth
percentage and D1=D0(1+g%)
• Now
value/share=D0(1+g%)/(1+ke%)
+D0(1+g%)^2/(1+Ke%)^2+…+D
n(1+g%)^n/(1+Ke)^n
• This can be simplified to:
• Value/share=D1/(Ke%-g%)
proof!
• Note: assume Ke%>g% and
D0(1+g)^n/(1+Ke)^n converges
to 0 (nil) for this reason
• This is a growing Perpetuity:
Bear market?
How to…dividend growth model
• Vs(ultimo 2011)=
•
•
D12/(1+ks)+D13/(1+ks)^2…+D15/(1+ks)^4+P/(1+ks)^4
If the first 4 dividends/annum are estimated (D12-D15): D(2012)=$$0.32;
D(2013)=$0.41; D(2014)=$$0.50 and D(2015)=$ 0.60
Ks= 11% and growth rate%=9.375%.
• Note that : D15/(1+ks)^4+P/(1+ks)4=(D15+P)/(1+ks)^4
•
•
•
•
With P= D15(1+g)/(ks-g)
So do not forget to after you calculate P take the present value of P since P is the
“Price” of the cash flows after 2015 calculated at the end of 2015…and we calculate
value per 1st january 2012…so discount at (1+ks)^4
The Price in 2015 follows from: P(2015)= D(2015)*(1+g)/(11%-g%) P(2015)=
$0.60*(1.09375)/(11%-9.375%)= $40.38
From the equation under a) it follows: V(2011)=
$0.32/1.11+$0.41/(1.11)^2+$0.50/(1.11)^3+$0.60+$40.38(from a)/(1.11)^4= $
27.98
Practice…
An investor estimates to receive the following dividends per share :
2012: $ 0.50
2013: $ 0.66
2014: $ 0.83
2015: $ 1.00
The Required Return on Equity is 11.1% what is the estimated Value of the stock
per 1st January 2012 assuming the investor would keep the stock (forever) and
would continue to receive the dividend while dividends keep growing with 7.7%
after the year 2015?
Assignment 6: Dividend Model
•
•
•
•
•
•
•
•
•
•
Go to Yahoo Finance
Find out if your team’s company pays
dividend and how much per share
What are the earnings per share (latest
figures)
What is the pay out ratio (dividends per
share/earnings per share)
Find out how much dividend the company
has paid in the past per share
Find g% (the dividend growth)
Assume the Cost of equity as dcf
Use the dividend growth model to
calculate the value per share and
compare it with today’s share price of
your company
Does the share market values your
company shares higher or lower then the
dividend growth model?
Why do you think this is the case?
Rate of Return (yield)
• The Yield to Maturity (YTM) for bonds
is:
• Say you know today’s price of a bond
• You know also the coupon rate and
how many times the coupon will pay
per year
• But you would like to calculate at
which Kd (yield) the present value of
all coupons and the $ 1000 at maturity
will result in todays price; this Kd is
the “Yield “
Illustration
• A Bond can be bought today
for $ 761
• The coupon is $80 (8%) per
year
• Maturity is 12 years
• So we want to find Kd in:
• $761=$80/(1+Kd)^1+$80/(1+K
d)^2+…+$80/(1+Kd)^12
• We can find it with trial and
error or with the IRR%
function in Excel…(treat $761
as initial cash out)
• Kd=11.828%
Jump!
Homework week 4-5
• Use the Dividend Growth Model to
calculate the Intrinsic Value of the Stock of
your S&P500 Company
• Take a bond issued by your company (or
by Apple Inc.) and use the valuation
method we discussed to value the bond
End of Session
So where are you with your assignments?