2-11 Notes BF - percent every period o Supernormal growth...

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2/11/08 Business Finance Notes Cash flows for Stockholders o If you buy a share of stock, you can receive cash in two ways The company pays dividends You sell your shares, either to another investor in the market or back to the company o As with bonds, the price of the stock is the present value of these expected cash flows. Developing the model o You could continue to push back the year in which you will sell the stock Estimating Dividends: Special Cases o Constant dividend The firm will pay a constant dividend forever This is like preferred stock The price is computed using the perpetuity formula o Constant growth dividend The firm will increase the dividend by a constant
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Unformatted text preview: percent every period o Supernormal growth Dividend growth is not consistent initially, but settles down to constant growth eventually • Zero Growth o If dividends are expected at regular intervals forever, then this is a perpetuity and the present value of expected future dividends can be found using the perpetuity formula P = D / R • Dividends Growth Model o P = D (1 + g) = D 1 R – g R – g o Dividends are expected to grow at a constant percent per period o (examples at 2/11) • Discount rate = Growth rate + Dividend yield o R = D 1 + g P...
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This note was uploaded on 04/07/2008 for the course BA 3341 taught by Professor Polkovnichenko during the Spring '08 term at University of Texas at Dallas, Richardson.

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