Corporate Finance (MAIB FIN 101) Aug 2022

Unit 4
Valuing stocks and bonds,
interest rates,
equity markets and stock
valuations,
common and preferred stock
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Valuing Stocks

• Common Stock Valuation

• PV (share of common stock) = PV (expected future dividends per share)
• Why no consideration of capital gains?
• Consider the rate of return r =

• So

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Valuing Stocks

• Forward substitution of H periods gives:

• Since common stocks do not expire, H could be infinite.

• So consider . Then we have:

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Common Stocks

1. Long-term Source
• It is a long-term source of financing. It is most popular method to raise permanent capital.
2. Par Value
• Issuer sets the par value of common stock. Generally, par value of stock is
divisible by 10 such as $10, $20, $50, $100 etc.

3. No Maturity
• Another feature of common stock is that it lacks maturity period. It is a permanent capital
and exists till the existence of the company.
4. Ownership
• Common stock-holders are the real owners of the company. So, it provides ownership to
the investors.

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Common Stocks

5. Limited Liability
• In case of business failure, stockholders lose their investment. But their liability is
limited to their investment or par value.
6. Residual Claim
• Stockholders have residual claim on the income and other properties in case of
failure, liquidation or bankruptcy.
7. Voting Right
• Common stockholders get voting right in the election of board of members and they
can take part in annual general meet of the company.

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Preferred Stocks
• Preference in assets upon liquidation: The shares provide their holders with
priority over common stock holders to claim the company’s assets upon
liquidation.
• Preference in dividends: Preferred shareholders have a priority in dividend
payments over the holders of the common stock.
• Non-voting: Generally, the shares do not assign voting rights to their holders.
However, some preferred shares allow its holders to vote on 
extraordinary events.
• Convertibility to common stock: Preferred shares may be converted to a
predetermined number of common shares. Some preferred shares specify the
date at which the shares can be converted, while others require approval from
the board of directors for the conversion.
• Callability: The shares can be repurchased by the issuer at specified dates.
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Bonds
• BOND FEATURES AND PRICES
• a coupon is the interest payment received by a bondholder from the date of
issuance until the date of maturity of a bond.

• The face value of a bond is the price that the issuer pays at the time of
maturity, also referred to as “par value.”

• Yield to maturity (YTM) is the total rate of return that will have been earned by a
bond when it makes all interest payments and repays the original principal.
YTM is essentially a bond's internal rate of return (IRR) if held to maturity.

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Purchase of a long term bond in 2017
When a French bond matures in 2025, the government pays you the final €6.00
interest, plus the principal payment of €100. Your first coupon payment is in one year’s
time, In October 2018. So the cash payments from the bond are as follows:

In October 2017, other medium-term French government bonds offered

a return of just .3%

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Bonds
When the bond matures in 2025, the government pays you the final €6.00 interest, plus the
principal payment of €100. Your first coupon payment is in one year’s time, in October 2018.
So the cash payments from the bond are as follows:

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Interest rates

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Bond valuation
• Bond value =
• Where t = periods to maturity, C is the coupon amount, r is the interest rate,
and F is the par value of the bond.
• So, Bond value = Present value of all coupons + PV of face value.

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