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Unformatted text preview: 1 Stock Valuation By Quach Manh Hao Cash Payoff from Holding Stock s A share represents partial ownership of a firm and entitles you to the residual cash flows of a firm. s The cash payoff from holding stock takes two forms: dividends and capital gains (or losses). s Dividends are typically paid quarterly by firms. s Capital gains (or losses) accrue when the stock is sold. Holding stock for one period s Suppose you buy a share of IBM today, collect the dividend paid at the end of one period and then sell the share. Suppose you know the required rate of return r. What would you pay for the share? share. on the return of rate required the and period, next share per dividend expected period next of end at the share a of price expected ˆ share a of price current the where 1 ˆ 1 1 1 1 1 = = = = + + + = s s s k D P P k P k D P Dividend and Capital Gain Yield yield. gain capital the ˆ and yield, dividend the where ˆ 1 1 1 1 =- =- + = P P P P D P P P P D k s Holding Stock forever ( ) share. on the return of rate required the and , period in share per dividend expected share a of price current the where 1 1 = = = + = ∑ ∞ = s t t t s t k t D P k D P Holding Stock for N periods ( ) ( ) share. on the return of rate required the and , period in share per dividend expected period of end at the share a of price expected ˆ share a of price current the where 1 ˆ 1 1 = = = = + + + = ∑ = s t N N s N N t t s t k t D N P P k P k D P 2 Holding Stock for N periods ( ) ( ) ( ) ( ) ∑ ∑ ∑ ∞ = ∞ + =- = + = ⇒ + = + + + = 1 1 1 1 1 ˆ But 1 ˆ 1 t t s t N t N t s t N N s N N t t s t k D P k D P k P k D P Example 1 s It is January 1 and you are considering purchasing IBM stock....
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- Spring '11