Com 21 corporate finance present value and

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Unformatted text preview: future dividends plus the present value of the horizon stock price, PH. Div3  P3 Div1 Div 2   2 1  r 1  r 1  r 3 P0 # P0 Div1 Div 2 Div H  PH  " 2 1  r 1  r 1  r H H Divt PH ¦ 1  r  1  r t H t1 Download free ebooks at bookboon.com 21 Corporate Finance Present value and opportunity cost of capital The final insight is that as H approaches zero, [PH / (1+r)H] approaches zero. Thus, in the limit the current stock price, P0, can be expressed as the sum of the present value of all future dividends. Discounted dividend model f P0 (16) Divt ¦ 1  r t t1 In cases where firms have constant growth in the dividend a special version of the discounted dividend model can be applied. If the dividend grows at a constant rate, g, the present value of the stock can be found by applying the present value formula for perpetuities with constant growth. Discounted dividend growth model P0 (17) Div1 rg The discounted dividend growth model is often referred to as the Gordon growth mode...
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