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BUSI 2504 (2)

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BUSI 2504
Robert Riordan

Chapter 8 Notes If you have a share of stock, you can receive cash in two ways: 1. The company pays dividends. 2. You sell your shares, either to another investor in the market or back to the company. As with bond price of stock is the PV (present value) of these expected cash flows. Stock is more difficult to value in practice than bond:  Not even the promised cash flows are known in advance.  Life of investment is forever (no maturity).  No way to easily observe the rate of return that market requires. P0= (D1 + P1) (1+r) P1= (D2 + P2) (1+r) Estimating dividends:- • Constant dividends (zero growth): - The firm will pay constant dividends forever. - This is like preferred stock. - Price is computed using perpetuity formula: P0= D r • Constant dividend growth: - The firm will increase the dividend by a constant % every period. P0= Dt (r-g ) • Supernormal growth: - Divi
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