MATH 2FM3 Lecture Notes - Lecture 11: Dividend Discount Model, Arithmetic Progression

• School: McMaster University
• Department: Mathematics
• Course: MATH 2FM3
• Professor: Petar Jevtic

Document Summary

2. 3 annuities with non-constant payments: suppose a series of n payments k1, k2, , kn equally spaced does not follow a pattern. Given i the interest rate per payment period, the accumulated value of this series at the time of the nal payment is. K1(1 + i)n 1 + k2(1 + i)n 2 + + kn 1(1 + i) + kn, and the present value one payment before the rst payment is. K1 + k2 2 + + kn 1 n 1 + kn n. According to this model price of stock equals the present value of the future dividends. Assuming: the next dividend is payable 1 year from now of amount k, the annual compound rate of the dividend is r, the interest used for calculating present value is i (cid:34) 1 + i price = k (cid:18) 1 + r (cid:19) 1 + r (cid:35) (1 + i)2 + .