MGT 181 Midterm: Study Guide Midterm 2
Document Summary
Stock is hard to value bc promised cf not known in advance, life of investment is essentially forever bc no maturity, no way to easily observe the rate of return that the market requires. If you buy a stock, two ways to receive cash: dividends, sell shares to another investor/back to company. The price of the stock is just the pv of all expected future dividends. Special cases: dividend has zero growth rate: P0 = d/r firm pays constant dividend forever, like preferred stock, perpetuity formula: dividend grows at a constant rate: Problem with dividends based stock valuation: many companies don"t pay dividends. Pe ratio: ratio of a stock"s price per share to earnings per share: Pt = benchmark pe ratio x epst (price at time t: benchmark pe ratio: comes from industry average/median or based on company"s own historical values, forecast prices (a few periods from today): target prices.
