FINE2000 - chapter 8.pdf - chapters COMMON It is generally...

This preview shows page 1 - 2 out of 3 pages.

chapters COMMON STOCK VALUATION It is generally more harder to value a share of a common stock than it is to value a bond bc : 1. promised cash flow is not Known in advance 2. life of the investment Is essentially forever as there is no maturity for common stock 3. no way to easily observe the rate of return that the market requires Common Stock Cash Flows : if Po is the current price of the stock , P , is the price in one period , and D , is the cash dividend paid at the end of the period then : Po = ( D , + P , ) /( / t r ) required e ttaasroenaet 's " ttpiaaafahafi " tfnpripderiod Ymmrmnarinut Zero Growth : share of common stock has a constant dividend Can be viewed as an ordinary perpetuity with a cash flow equal to D every period Po =D lr Constant Growth : if we Know that the dividend will grow at a steady rate (g) then Dt = Do X ( It g) t R periods as long as the growth rate " of " is less than the discount rate ( r ) , the PV of this series of cash flows can be written as the growing perpetuity formula Po = De+ , / ( t g)

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture