Unformatted text preview: y have the last claim on the assets of the firm after paying off creditors and bond holders and preferred stockholders
They are also residual owners How to value common stock?
How to value common stock? PV of expected cash flows for common stockholders when discounted at the required rate of return for the common stockholders
What cash flows are expected by common stockholders? An unequal stream of dividends for each year Value of Common Stock = PV of dividends for common stock holders
Simplifying Assumptions to Value Common Stock Zero Growth Model
Constant Growth Model Zero Growth Model
Zero Growth Model If we assume that dividend for common stockholder will be the same every year
DIV1 = DIV2 =DIV3=……=DIV∞
Under zero growth model, stockholders anticipate to receive the same amount of dividend per year forever
Thus, we have a perpetuity of dividends
Price of Stock will equal the present value of this perpetuity
Examples Constant Growth Model
Constant Growth Model If we assume that dividends grow at a constant rate of ‘g’ per year forever DPS1 P0 = r g...
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