econ423lec15

econ423lec15 - 1 STOCK MARKETS PART II STOCK MARKETS PART...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 7/10/2009 1 STOCK MARKETS, PART II STOCK MARKETS, PART II INTRODUCTION TO MORTGAGES INTRODUCTION TO MORTGAGES JULY 10 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today b Stock Valuation b The Gordon Growth Model b Price Earnings Valuation Model b Prices and Errors in Valuation b Introduction to Mortgages b Homework #5 Questions Recall from last time… b We can value stocks by discounting the future cash flows we receive from them b Dividends and future sales of shares. b We’ve discussed two methods of valuation so far: b One Period Valuation Model b Generalized Dividend Valuation Model b We’ll discuss two additional methods today. Recall from last time… b Generalized Valuation Model: b A selling price far in the future is discounted heavily b As n →∞ →∞ →∞ →∞ , you could also write this as: b Problem – Infinite sums don’t always converge, and can be computationally taxing. ( 29 ( 29 ( 29 ( 29 n e n n e n e e k P k D k D k D P + + + + + + + + = 1 1 ... 1 1 2 2 1 1 ( 29 ∑ = + = n t t e t k D P 1 1 The Gordon Growth Model b Assumes that dividends grow at a constant rate each year b A goal for some firms. b With this assumption, we can rewrite the generalized valuation model as: b D = Most recent dividend paid b g = Expected growth rate in dividends (constant) ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 ∞ ∞ + + ⋅ + + + + ⋅ + + + ⋅ = e e e k g D k g D k g D P 1 1 ... 1 1 1 1 2 2 1 1 The Gordon Growth Model b With some algebra, the equation above can be shown to simplify to: b Let’s see how… ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 ∞ ∞ + + ⋅ + + + + ⋅ + + + ⋅ = e e e k g D k g D k g D P 1 1 ... 1 1 1 1 2 2 1 1 ( 29 ( 29 ( 29 g k D g k g D P e e- =- + ⋅ = 1 1 7/10/2009 2 Deriving the Gordon Growth Model b Multiplying both sides of this equation by we obtain: b Subtracting Equation (1) from Equation (2): ( 29 ( 29 ( 29 ( 29 g k k g D k g D g k P e e e e + + ⋅...
View Full Document

{[ snackBarMessage ]}

Page1 / 5

econ423lec15 - 1 STOCK MARKETS PART II STOCK MARKETS PART...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online