INSTRUCTIONS: ADD BEAUTIFUL COVER PAGE
Similarity report should be less than 10%
See the Purdue Owl link to proper use of APA
https:
owl.purdue.edu/owl
esearch_and_citation/apa_style/apa_style_introduction.html
Write a 4 page paper (1,200 or more words) in APA format. Below is a recommended outline.
1. Cover page (See APA Sample papers in www.apastyle.org OR https:
owl.english.purdue.edu/owl
esource/560/01/)
2. Introduction
a. A thesis statement
. Purpose of pape
c. Overview of pape
3. Body (Cite sources with in-text citations.)
4. Conclusion – Summary of main points plus Lessons Learned and Recommendations
5. References – List the references you cited in the text of your paper according to APA format.
(Note: Do not include references that are not cited in the text of your paper)
Support all assertions with proper scholarly research, using at least 5 references (scholarly articles published in peer-reviewed academic journals). Proper APA formatting is expected (cited sources, cover page, reference page, etc.).  Your submission should be presented in the form of a business document. Presentation counts!
Research Paper 1: Find the most recent Annual Report/10-K Report for Roku, Inc.. Submit a two-page double spaced paper summarizing the nature and performance of that company. Use information from the most recent 10K Report. Briefly discuss the nature of the company including history, main lines of business, financial performance overview and ratios (revenue growth, profitability, liquidity, asset efficiency, working capital, interest coverage, leverage, and operating returns), controls, risks, and ethics issues as discussed in Chapter 2 and Chapter 7 of the text. Submit a two-page double spaced paper summarizing for your boss your analysis including
ief summary exhibits explaining your analysis and supporting your recommendation. Would you recommend investing in the company? Why or why not?
Fundamentals of Corporate Finance, Fourth Edition
Fundamentals of Corporate Finance
Fourth Edition
Chapter 7
Stock
Valuation
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1
Chapter Outline
7.1 Stock Basics
7.2 The Mechanics of Stock Trades
7.3 The Dividend-Discount Model
7.4 Estimating Dividends in the Dividend-Discount Model
7.5 Limitations of the Dividend-Discount Model
7.6 Share Repurchases and the Total Payout Model
7.7 Putting It All Togethe
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Learning Objectives
Understand the tradeoff between dividends and growth in stock valuation
Appreciate the limitations of valuing a stock based on expected dividends
Value a stock as the present value of the company’s total payout
Describe the basics of common stock, prefe
ed stock, and stock quotes
Compare how trades are executed on the NYSE and NASDAQ
Value a stock as the present value of its expected future dividends
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7.1 Stock Basics (1 of 3)
Stock Market Reporting: Stock Quotes
Common Stock
Ticker Symbol
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Figure 7.1 Stock Price Quote for Nike (NKE)
This screenshot from Google Finance shows the basic stock price information and price history charting for the common stock of Nike. The historical price chart covers the period mid-Fe
uary through late June 2013. The price of $60.39 is for June 25, 2013.
Source : www.google.com/finance?q=nke.
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7.1 Stock Basics (2 of 3)
Common Stock
Shareholder Voting
Straight Voting
Cumulative Voting
Classes of Stock
Shareholder Rights
Annual Meeting
Proxy
Proxy Contest
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7.1 Stock Basics (3 of 3)
Prefe
ed Stock
Cumulative versus Non-Cumulative Prefe
ed Stock
Prefe
ed Stock: Equity or Debt?
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7.2 The Mechanics of Stock Trades
Market Orde
Limit Orde
Round Lot
Super Display Book System
Floor Broke
Deale
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7.3 The Dividend-Discount Model (1 of 8)
A One Year Investo
Two potential sources of cash flows from owning a stock:
Dividends
Selling Shares
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7.3 The Dividend-Discount Model (2 of 8)
A One Year Investo
Since the cash flows are not risk-less, they must be discounted at the equity cost of capital
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7.3 The Dividend-Discount Model (3 of 8)
Dividend Yields, Capital Gains, and Total Returns
Dividend Yield
Capital Gain
Capital Gains Rate
Total Return
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7.3 The Dividend-Discount Model (4 of 8)
Dividend Yields, Capital Gains, and Total Returns
The expected total return of the stock should equal the expected return of other investments available in the market with equivalent risk
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Example 7.1 Stock Prices and Returns (1 of 4)
Problem
Suppose you expect Longs Drug Stores to pay an annual dividend of $0.56 per share in the coming year and to trade for $45.50 per share at the end of the year. If investments with equivalent risk to Longs’ stock have an expected return of 6.80%, what is the most you would pay today for Longs’ stock? What dividend yield and capital gain rate would you expect at this price?
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Example 7.1 Stock Prices and Returns (2 of 4)
Solution
Plan
We can use Eq. 7.1 to solve for the beginning price we would pay now (P0) given our expectations about dividends (Div1 = $0.56) and future price (P1 = $45.50) and the return we need to expect to earn to be willing to invest (rE = XXXXXXXXXXWe can then use Eq. 7.2 to calculate the dividend yield and capital gain rate.
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Example 7.1 Stock Prices and Returns (3 of 4)
Execute
Using Eq. 7.1, we have
Refe
ing to Eq. 7.2, we see that at this price, Longs’ dividend yield is
The expected capital gain is $45.50 − $43.13 = $2.37 per share, for a capital gain rate of
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Example 7.1 Stock Prices and Returns (4 of 4)
Evaluate
At a price of $43.13, Longs’ expected total return is 1.30% + 5.50% = 6.80%, which is equal to its equity cost of capital (the return being paid by investments with equivalent risk to Longs’). This amount is the most we would be willing to pay for Longs’ stock. If we paid more, our expected return would be less than 6.8% and we would rather invest elsewhere.
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Example 7.1a Stock Prices and Returns (1 of 4)
Problem:
Suppose you expect Koch Industries to pay an annual dividend of $2.31 per share in the coming year and to trade $82.75 per share at the end of the year. If investments with equivalent risk to Koch’s stock have an expected return of 8.9%, what is the most you would pay today for Koch’s stock?
What dividend yield and capital gain rate would you expect at this price?
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Example 7.1a Stock Prices and Returns (2 of 4)
Solution:
Plan:
We can use Eq. 7.1 to solve for the beginning price we would pay now (P0) given our expectations about dividends (Div1=$2.31) and future price (P1=$82.75) and the return we need to expect to earn to be willing to invest (rE=0.089).
We can then use Eq. 7.2 to calculate the dividend yield and capital gain.
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Example 7.1a Stock Prices and Returns (3 of 4)
Execute:
Refe
ing to Eq. 7.2 we see that at this price, Koch’s dividend yield is
The expected capital gain is $82.75 − $78.11 = $4.64 per share, for a capital gain rate of
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Example 7.1a Stock Prices and Returns (4 of 4)
Evaluate:
At a price of $78.11, Koch’s expected total return is 2.96% + 5.94% = 8.90%, which is equal to its equity cost of capital (the return being paid by investments with equivalent risk to Koch’s). This amount is the most we would be willing to pay for Koch’s stock.
If we paid more, our expected return would be less than 8.9% and we would rather invest elsewhere.
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7.3 The Dividend-Discount Model (5 of 8)
A Multiyear Investo
Suppose we planned to hold the stock for two years
Then we would receive dividends in both year 1 and year 2 before selling the stock, as shown in the following timeline:
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7.3 The Dividend-Discount Model (6 of 8)
A Multiyear Investo
The formula for the stock price for a two-year investor is the same as that for a sequence of two one-year investments
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7.3 The Dividend-Discount Model (7 of 8)
Dividend-Discount Model Equation
The price of the stock is equal to the present value of all of the expected future dividends it will pay, along with the cash flow from the sale in year N
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7.3 The Dividend-Discount Model (8 of 8)
Dividend-Discount Model Equation
Alternatively, rather than having a stopping point where we sell the shares, we can rewrite the equation to show that the dividends go on into the future
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7.4 Estimating Dividends in the Dividend-Discount Model (1 of 7)
Constant Dividend Growth
Assumes that dividends will grow at a constant rate, g, foreve
The value of the firm depends on the dividend level of next year, divided by the equity cost of capital adjusted