01:220:301 Lecture Notes - Lecture 7: Loss Aversion, Efficient-Market Hypothesis, Federal Funds Rate
Document Summary
Common stock is the principal way that corporations raise equity capital. (cid:1) Stockholders those who hold stock in a corporation own an interest in the corporation proportional to the percentage of outstanding shares they own. This ownership interest gives them a bundle of rights. Dividends are payments made periodically, usually every quarter, to stockholders. (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) The gordon growth model: dividends are assumed to continue growing at a constant rate forever, the growth rate is assumed to be less than the required return on equity, ke. The price is set by the buyer willing to pay the highest price. The market price will be set by the buyer who can take best advantage of the asset. Superior information about an asset can increase its value by reducing its perceived risk. Information is important for individuals to value each asset. When new information is released about a firm, expectations and prices change.
