COMMERCE 3FA3 Chapter Notes -Stock Valuation, Common Stock, Dividend Discount Model

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 3FA3
• Professor: T W Chamberlain

Document Summary

Hard to value because: not even the promise of cash flows are known in advance, life of investment is essentially forever, no maturity, no way to easily observe the rate of return that the market requires. D1= cash dividend paid at the end of the period. Po = d1/ (1+r)1 + d2/ (1+r)2 + d3/ (1+r)3 . A share of common stock in company with a constant dividend is much like a share of preferred stock. Po = d/r r= required rate of return. Constant growth: stock with dividends that grows at a constant rate forever is an example of a, dividend growth model (a. k. a. Po = do(1+g)/ (r-g) = d1/ (r-g) as long as g