lecture 23 - Business Finance Lecture 23 Review of the...

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

View Full Document Right Arrow Icon
121 Business Finance Lecture 23 Review of the Previous Lecture Bond Valuation Determinants of Term Structure Real Rate of Interest Expected inflation Interest Rate Risk Bond Yields and the Yield Curve Equity Markets and Stock Valuation Common Stock Valuation Topics under Discussion Some Special Cases in Stock Valuation Zero growth Stocks Constant Growth Stocks Non-Constant Growth Stocks Zero Growth Stocks A share of common stock in a company with a constant dividend is termed as zero growth type of stocks. Which implies: D 1 = D 2 = D 3 = D = constant So the value of the stock is: P 0 = D D D _ D _ (1 + R) 1 (1 + R) 2 (1 + R) 3 (1 + R) 4 Since dividend is always the same, the stock can be viewed as an ordinary perpetuity with a cash flow equal to D every period. So the per share value is P 0 = D/R where R is the required rate of return CVP corporation has a policy of paying a $10 per share dividend every year. If this policy is to continue indefinitely, what is the value of a share of stock if the required rate of return is 20%? Since the stock amounts to be a perpetuity, value of the share is $10/0.20 = $50 per share Constant Growth Stocks
Background image of page 1

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

View Full DocumentRight Arrow Icon
122 Stocks, the dividend for which grow at a steady rate termed as growth rate g. If we let D 0 be the dividend just paid, then the next dividend, D 1 is D 1 = D 0 x (1 + g) Dividend in two periods is : D 2 = D 1 x (1 + g) = [D 0 x (1 + g)] x (1 + g) = D 0 x (1 + g) 2 We can repeat this process to generalize it for any number of periods as D t = D 0 x (1 + g) t An asset with cash flows that grow at a constant rate forever is called a growing perpetuity
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

lecture 23 - Business Finance Lecture 23 Review of the...

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