Valuation of Long Term Securities
Joint MBA Shanghai
Week 5- 2015
邦保罗
What has Mickey Mouse got to do
with this?
•
•
•
•
•
•
•
•
•
•
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 had 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.
D
IS
N
E
Y(W
A
L
T)NYSE-DIS
TIMELINESS
SAFETY
TECHNICAL
3 Lowered 4/29/11
1 Raised 2/13/09
3 Lowered 11/11/11
BETA 1.05 (1.00 = Market)
2
0
1
4
-1
6P
R
O
J
E
C
T
IO
N
S
P
ric
e G
a
in
H
ig
h 80 (+140%)
L
o
w 65 (+95%)
Insider Decisions
High:
Low:
43.9
26.0
R
E
C
E
N
T
P
R
IC
E
34.8
15.5
25.2
13.5
23.8
14.8
3
3
.6
0PR/AETIO1
2
.2(
0
.8
7DYILVD’D 1
.2
%VALUE
LINE
)
T
ra
ilin
g
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4.0 R
E
L
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e
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/ER
A
T
IO
28.4
20.9
30.0
22.9
34.9
23.8
36.8
30.7
35.0
18.6
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15.1
38.0
28.7
44.3
28.2
T
a
r
g
e
tP
r
ic
eR
a
n
g
e
2014 2015 2016
LEGENDS
12.0 x ²Cash Flow² p sh
. . . . Relative Price Strength
3-for-1 split 7/98
Options: Yes
Shaded areas indicate recessions
120
100
80
64
48
A
n
n
’lT
o
ta
l
R
e
tu
rn
25%
19%
32
24
20
16
12
DJ FMAMJ JA
toB
u
y 0 0 0 0 0 0 0 0 1
O
p
tio
n
s 0 9 4 2 0 0 0 2 0
toS
e
ll
4 5 3 3 0 0 0 2 0
%TOT. RETURN 10/11
Institutional Decisions
4
Q
2
0
1
0 1
Q
2
0
1
1 2
Q
2
0
1
1 Percent
toB
u
y
416
470
459 shares
toS
e
ll
576
541
547 traded
H
ld
’s
(0
0
0
)124588012784281253380
12
8
4
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
THIS
STOCK
1
y
r
.
3
y
r
.
5
y
r
.
2
.4
3
9
.7
1
7
.3
8
VL ARITH.*
INDEX
4
.9
8
2
.1
2
7
.6
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P
ric
e G
a
in
H
ig
h 80 (+140%)
L
o
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Insider Decisions
A
n
n
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o
ta
l
R
e
tu
rn
25%
19%
DJ FMAMJ JA
toB
u
y 0 0 0 0 0 0 0 0 1
O
p
tio
n
s 0 9 4 2 0 0 0 2 0
toS
e
ll
4 5 3 3 0 0 0 2 0
Institutional Decisions
And the remainder
4
Q
2
0
1
0 1
Q
2
0
1
1 2
Q
2
0
1
1 Percent
toB
u
y
416
470
459 shares
toS
e
ll
576
541
547 traded
H
ld
’s
(0
0
0
)124588012784281253380
12
8
4
…(you can enlarge to read or download the doc.)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
32
24
20
16
12
%TOT. RETURN 10/11
THIS
STOCK
1
y
r
.
3
y
r
.
5
y
r
.
2
.4
3
9
.7
1
7
.3
8
VL ARITH.*
INDEX
4
.9
8
2
.1
2
7
.6
©V
A
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EL
IN
EP
U
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down 2%, year over year.
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Dreamworks’ War Horse in December,
John Carter of Mars due out in March,
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
Thanks!
• 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
• The bond is sold at a
premium: So now the bond
has a value higher then its
face value…
Donald’s Uncle
“When will this bond sell at face
value (at par)?”
• If the coupon rate offered by the
issuer of the bond (10%) is
equal to the return (Kd) the
investor demands; so if Kd=10%
• The return offered (coupon rate)
is equal to the required Kd so the
investor is willing to pay the full
amount of $ 1000
• Check it out!
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
Investor: Have lunch or be lunch!
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
Zero Coupon 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+$100
0/(1+14%/2)^24= $
770,45
Demo; 2 coupons per year!
Preferred stock valuation
• Preferred stock offers preferred
dividend
• A perpetual stream of fixed
dividends will make the valuation
look like a perp[etual 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
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+K
e)^n
• So if D1=D2=D3=…=Dn= $10
• And Ke is 10% Value/share=
$10/10%=$ 100
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
Bear market?
Homework assignment
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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 that Ke=10%
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 initia; cash out)
• Kd=11.828%
Jump!
Note that
• If interest rates rise
bond prices fall
• If interest rates fall
bond prices increase
• So interest rates and
bond prices move in
opposite directions
Climb!
End of chapter