MGT338H5 : Stocks
Document Summary
We want to attempt to value a stock. Stocks often provide dividends, and also provide the sale price when the stock is sold. P0 = div1/(1+r) + div2/(1+r)2 + p2/(1+r)2. Continuing we get: p0 = div1/(1+r) + div2/(1+r)2 + div3/(1+r)3 + . In the case of constant dividends, div1 = div2 = and p0 = div/r (using the perpetuity formula) In the case of constant growth div1 = div0(1+g), div2 = div1(1+g) etc. The above model, *, is called the dividend discount model, or the gordon model, named after professor myron gordon of the university of toronto. Exercise: differential growth growth at rate g1 for the first t years and growth at rate g2 after that. Draw a picture describing the series of dividends (start from div1 in 1 year) and derive the formula for the price, p, of the stock. Earnings next year = earning this year + retained earnings this year x return on retained earnings.
