chapter 4 SECURITIES VALUATION

Chapter Securities valuation 06/08/2011 B02003 - securities valuation Chapter 4: Securities valuation 4.1 Time value of money 4.2 Bond valuation 4.3 Stock valuation (website: http://www.teachmefinance.com) 06/08/2011 B02003 - securities valuation 4.1 Time value of money 4.1.1 Time series 4.1.2 Future value 4.1.3 Present value 06/08/2011 B02003 - securities valuation 4.1.1 Time series • Time series is an important tool used in analyzing value of money overtime, presented by a shape with time marks of money on it 0 10% $100 FV=? • Unit to calculate time marks is often year, may be quarter, month, or day depending on each specific situation 06/08/2011 B02003 - securities valuation 4.1.1 Future value • Principle • Definition • Formula to quantify future value of the amount of present money • Formula to quantify future value of an annuity 06/08/2011 B02003 - securities valuation Concept of future value • Future value (FV): The value of a present amount at a certain date in the future based on a determined rate of return 06/08/2011 B02003 - securities valuation Principle • Money has a time value : a VND received today is more valuable than a VND received in the future • Reasons : – Inflation – Risk – Opportunity cost 06/08/2011 B02003 - securities valuation Formula for future value • Future value of a sum of present money FV = PV x 1  r1 1  r2  1  rn  If the interest rate is unchanged through years FV = PV x 06/08/2011 1  r  n B02003 - securities valuation Future value formula for an annuity • If C is the amount of money paid annually from the 1st year to nth year, after n years the future value of C annuity is :  1  r   1   r   n • FVA = C x 06/08/2011 B02003 - securities valuation 4.1.3 Present value • • • • Definition Present value of a single sum Present value of annuity Present value of the disparate currency series 06/08/2011 B02003 - securities valuation Bond valuation formula when the bond interest rate is fixed: C1  C2  C3   Cn n C M P  t n 1  r  t 1 1  r  1  1  r  n  n P  C   M 1  r  r   06/08/2011 B02003 - securities valuation Zero-coupon bond valuation formula: M P n 1  r  06/08/2011 B02003 - securities valuation Coupon interest rate: Coupon interest rate is the interest rate calculated based on par value which the issuer of a bond agrees to pay each year to the bondholder 06/08/2011 B02003 - securities valuation Current interest rate • Measure yield rate of a bond at a time C CY  P • If price of current bond is equal to its par value : current interest rate = coupon interest rate • If price of current bond > () coupon interest rate 06/08/2011 B02003 - securities valuation Yield to maturity (YTM) • The rate of return anticipated on a bond if it is held until the maturity date n C M P  t n 1  y  t 1 1  y  y  YTM Use the Rate function in excel with type = http://www.mysmp.com/video/bonds/how-get-yield-maturity-ytm-excel.html 06/08/2011 B02003 - securities valuation Internal Rate of Return – IRR • The discount rate often used in capital budgeting that makes the net present value of all cash flows from investment equal to zero n • CF P t 1 t 1  r  t P : capital invested in buying bond CFt : the Cash Flow generated in year t n : the number of years 06/08/2011 B02003 - securities valuation Relationship among coupon interest rate, required interest rate and price • Coupon interest rate< required interest rate: price < par value • Coupon interest rate > required interest rate: price > par value • Coupon interest rate = required interest rate: price = par value 06/08/2011 B02003 - securities valuation 4.3 Stock valuation 06/08/2011 B02003 - securities valuation Dividend Discount Model (DDM) • Value of common share is the present value of all expected dividend cash flow in the future:  Dt P0   t t 1 1  r  06/08/2011 B02003 - securities valuation Dividend Discount Model in a limited time: n Dt Pn P0    n 1  r  t 1 1  r t 06/08/2011 B02003 - securities valuation The Dividend Discount Model with No Growth • D0 = D1 = D2 = … Di = D D P0  r 06/08/2011 B02003 - securities valuation Constant – Growth Dividend Discount Model • Supposing that dividends increase evenly each year g %: D1 P0  r  g  • Condition: g the price of share: • Po = P/E branch x EPS • Example : P/E branch is 12, EPS of the share A is 2000 VND/share  the price of share is 24.000VND 06/08/2011 B02003 - securities valuation Free Cash Flow Model (FCF) • Go to http://www.analystforum.com/samples/sch weser/ 06/08/2011 B02003 - securities valuation .. .Chapter 4: Securities valuation 4. 1 Time value of money 4. 2 Bond valuation 4. 3 Stock valuation (website: http://www.teachmefinance.com) 06/08/2011 B02003 - securities valuation 4. 1 Time... - securities valuation 4. 1 Time value of money 4. 1.1 Time series 4. 1.2 Future value 4. 1.3 Present value 06/08/2011 B02003 - securities valuation 4. 1.1 Time series • Time series is an important...  06/08/2011 B02003 - securities valuation 4. 2 Bond valuation 4. 2.1 Definition and basic bond valuation formula 4. 2.2 Variables reflecting bond yield 4. 2.3 Measure the change in price of bond