Stocks%20Formulas

Stocks%20Formulas - TA: Lea Gimnez-Duarte Spring 09 Chapter...

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TA: Lea Giménez-Duarte Spring 09 1 / 3 Chapter 8 Present Value of Common Stocks Recall what you already learned : Profits = Dividends + Returned Earnings = Div + RE Note: P t+1 = Price at time of sale , P t = Price at time of purchase Rate of Capital Gain Pt Pt - 1 Pt Now, we are using very similar formulas as before the midterm, but with (a little) different names and applications. The variables names: P 0 … present value (or price) of a stock, P n … price of a stock at time n , Div today … dividend payment today i … di scount rate (= interest rate in case the stock is riskless) g dividend growth rate n … number of years r E … required yield on equity or equity cost of capital r f … long -rung real risk free return r r … long -rung real risk premium The required yield on equity or equity cost of capital: r E = r f + r r Expected Return to holding stock for one yea r (expected because we don’t k now what will Div and P will actually be next year, a.k.a. expected required yield on equity):
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Stocks%20Formulas - TA: Lea Gimnez-Duarte Spring 09 Chapter...

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