Money and Banking Post Lecture

Money and Banking Post Lecture - =(D1/1 ke(D2/1 ke^2)…...

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Post-Midterm 1 Lecture Stocks – represents a share of ownership in a firm. Payments are dividends. P0= current price of stock Di= expected dividend paid at the end of year I Ke= required return on investment in equity Pi= expected price of the stock at the end of year i Vi= value of the stock in period i *focus is equilibrium when price equals value In equilibrium, the price of a good or asset should reflect the value of the good or asset to the marginal buyer. Gordon Growth Model Assume that dividends grow at a constant rate Price equations so far: P0
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Unformatted text preview: = (D1/1+ke)+ (D2/1+ke^2)…. Gordon growth mode, price equation: P0= d0(1+g)/(1+ke)+ d0(1+g)^2/(1+ke)^2…. This simplifies to P0= D0(1+g)/(ke-g) >>> P0 = D1/(ke-g) This is the simplest way to think about stock prices. Financial Crisis: • Growth prospects (down), G (down), P0 (down) • Level of uncertainty (up), Ke (up) Fundamental Value of a stock, price or value of a stock is: P0 = sigma i=o to infinity (Di/ (1+ke)^i Bubble exists if P>Fundamental Value P0= sigma i=o to infinity (Di/(1+ke)^i...
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