Lecture 14

Lecture 14 - FIN 311 Instructor Syed Walid Reza Lecture 14...

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FIN 311 Instructor: Syed Walid Reza Lecture 14 Spring 2016
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Today Chapter 8 2
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Stock Valuation Value of the stock today is equal to the PV of all future cash flow (Dividends + Capital gains) 3
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Special Case 1: Constant Dividend (Zero Growth) Because , the stockholder will receive a fixed amount of dividend forever and ever and ever… This cash flow stream is similar to that of Perpetuity 4
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Special Case 2: Constant Growth Because , we have cash flows that is similar to those of Growing Perpetuity So, the value of the stock simplifies to Rearrange and get 5
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Non-constant Growth Examples A stock does not pay dividends for the first few (say 5) years. After that it pays dividends that grow at a constant rate Dividends are paid quarterly. They grow at high (but constant) rate for a few (say 5) years, and then grow at a constant rate 6
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Non-constant Growth How can you solve those problems? Step 1 : Draw the timeline Step 2 : Identify if some portions are similar to annuities OR
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