2-11 Notes BF

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

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

Ask a homework question - tutors are online