FIN 302 Lecture Notes - Lecture 16: Market Maker, Dividend Discount Model, Stock Valuation
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FIN 302 Full Course Notes
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Rationale: company"s value is derived as a discount stream of future dividends. Step-by-step methodology: project company"s next quarter dividend, estimate growth rate going forward, sustainable long-term growth rate (g) = (retention ratio)(roe, stock value = div_1 / (r-g) Retention ratio = % earnings retained in a firm (vs. paid as dividends) Same algebra as above: stock value = div_1/(r-g) Adjust the g rate based on how often the firm gives out dividends. Highly sensitive to estimates growth rate (human error) Requires extra assumptions for companies that currently do not pay dividends. Does not account for possible suspension or reduction in dividends. Execution of stock trades step-by-step: you must submit an order to your brokerage, market order - seeks immediate execution at current price a. i. Buy 200 shares of ge: limit order - order to buy or sell shares only at specified price, which is more favorable than the currently quoted price b. i.