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Lecture #12

Lecture #12 - Ec 136 Financial Economics Lecture 12 October...

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Unformatted text preview: Ec 136, Financial Economics Lecture 12 October 8 Outline for today 1. Dividend discount model 2. Dow at 36,000 3. Source of dividend growth www.econ.berkeley.edu/~szeidl/ec136/ec136index.htm Readings for this week: BKM 18.3-18.4, 18.7 (18.6 in editions 7&8) Problem set 4 : due October 13, Tues, in class. 1. Dividend discount model & Dividend discount model for stock price: P t = 1 X i =1 1 (1 + R ) i D t + i & When dividends expected to grow at constant rate G , P = D R ¡ G : & Comparative statics with respect to R , G , and D . { Let R = 6% and G = 5%; consider one per- centage point fall in G . & Small changes in R and G have a large e&ect on prices. 2. Dow at 36,000 & When DJIA was at 9 ; 000, James Glassman and Kevin Hassett argued in \Dow 36,000" that this level is four times too low. & Argument is based on P = D R ¡ G : & Dividend yield is D=P = 2%; hence we should have D = $9 ; 000 ¢ : 02 = $180....
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Lecture #12 - Ec 136 Financial Economics Lecture 12 October...

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