{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Thedividendstreamwouldbeaperpetuity 0 ks 13 1 2 200

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

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

Unformatted text preview: o 2: Constant Growth of Dividend The firm will pay a constant dividend forever The price is computed using the perpetuity formula The firm will increase the dividend by a constant percent every period Scenario 3: Nonconstant Growth Dividend growth is not consistent initially, but settles down to constant growth eventually Scenario 1: Constant dividend Scenario 1: Constant dividend 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 P0 = D / Ks Suppose stock is expected to pay a $0.50 dividend every quarter and the required return is 10% with quarterly compounding. What is the price? P0 = .50 / (.1 / 4) = $20 What would the expected price What would the expected price today ? The dividend stream would be a perpetuity. 0 ks = 13% 1 2 ... 2.00 2.00 PMT $2.00 P0 = = = $15.38 k 0.13 ^ 3 2.00 Scenario 2: Constant growth of Scenario 2: Constant growth of dividend A stock whose dividends ar...
View Full Document

{[ snackBarMessage ]}