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Unformatted text preview: Chapter 5 Chapter 5 Stock Valuation 1 Preferred Stock Preferred Stock Expected return, given V Expected return, given V ps ps = $50 = $50 and annual dividend = $5 and annual dividend = $5 2 V ps = $50 = $5 r ps ^ r ps $5 $50 ^ = = 0.10 = 10.0% Stock Value = PV of Stock Value = PV of Dividends Dividends 3 What is a constant growth stock? One whose dividends are expected to grow forever at a constant rate, g. P = ^ (1+r s ) 1 (1+r s ) 2 (1+r s ) 3 (1+r s ) ∞ D 1 D 2 D 3 D ∞ + + +…+ For a constant growth stock: For a constant growth stock: 4 D 1 = D (1+g) 1 D 2 = D (1+g) 2 D t = D (1+g) t If g is constant and less than r s , then: P = ^ D (1+g) r s  g = D 1 r s  g Calculating the required rate of return: Calculating the required rate of return: (r (r s s ) ) If beta = 1.2, r If beta = 1.2, r RF RF = 7%, and RPM = 5%. = 7%, and RPM = 5%....
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 Spring '08
 poindexter
 Management, Dividends, Stock Valuation, Valuation, Probability theory, rs, constant growth

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