This preview shows page 1. Sign up to view the full content.
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
2.00 Scenario 2: Constant growth of Scenario 2: Constant growth of dividend A stock whose dividends ar...
View Full Document
This document was uploaded on 01/14/2014.
- Winter '14