ITM 102 Study Guide - Canadian Tire, Canadian Business, Corporate Liability

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Present value of fcf (future cash flows) to determine share of stock value: D = cash dividend paid at the end of the period. R = required return in the market on the investment. Current price of the stock can be written as the pv of the dividends beginning in one period and extending out forever: Price of the stock today is = to the present value of all the future dividends. Special cases: dividend has a zero growth rate. Because the dividend is always the same, the stock can be viewed as an ordinary perpetuity. R = required rate of return: constant growth (the dividend grows at a constant rate) growing perpetuity. Only if the growth rate, g, is less than the discount rate, r, use the divident growth. To get the stock price at any point in time use: Pt = dt x (1+g)/r-g = dt+1/r-g: the dividend grows at a constant rate after some length of time.

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