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# LectureNote7 - LECTURE SEVEN What Determine the Prices of...

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LECTURE SEVEN What Determine the Prices of Common Stocks? ECONOMICS 209 Professor Kevin Huang Vanderbilt University

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7-1 The Stock Market We have examined how bond prices and interest rates are determined We now analyze the determination of the price of a common stock Unlike bonds, a stock has no maturity date and can be inexistence as long as the corporation stays solvent We focus on stocks that pay dividends
7-2 One-Period Valuation Model 11 0 0 1 1 (1 ) ) = the current price of the stock = the dividend paid at the end of year 1 = the required return on investment in equity = the sale price of the stock at the end of the ee e Div P P kk P k P =+ ++ first period

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7-3 Generalized Dividend Valuation Model 12 0 0 0 1 The value of stock today is the present value of all future cash flows ... (1 ) ) ) ) If is far in the future, it will not affect ) The price of the nn ee e e n t t t e DP DD P kk k k PP D P k = =++ ++ + + = + stock is determined only by the present value of the future dividend stream
7-4 Gordon Growth Model P 0 = D 0 (1 + g ) ( k e g ) = D 1 ( k e g ) D 0 = the most recent dividend paid g = the expected constant growth rate in dividends

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## This note was uploaded on 04/07/2008 for the course ECON 209 taught by Professor Professor during the Spring '08 term at Vanderbilt.

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LectureNote7 - LECTURE SEVEN What Determine the Prices of...

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