Unformatted text preview: future
dividends plus the present value of the horizon stock price, PH. Div3 P3
1 r 1 r 1 r 3 P0
Div H PH
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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