COMM 308 Chapter Notes - Chapter 7: Issued Shares, Discount Window, Dividend Discount Model

• School: Concordia University
• Department: Commerce
• Course: COMM 308
• Professor: Jennifer Yang

Document Summary

Equity securities: ownership interests in an underlying entity, usually a corporation: no fixed maturity date, pay dividends from after-tax earnings. Valuation of equity securities (cid:1863)=(cid:1844)(cid:1832)+(cid:1844)(cid:1871)(cid:1863) (cid:1868)(cid:1870)(cid:1857)(cid:1865)(cid:1873)(cid:1865: (cid:1863): the required return on an equity security, (cid:1844)(cid:1832): the risk-free rate of return ((cid:1844)(cid:1857)(cid:1853)(cid:1864) (cid:1870)(cid:1853)(cid:1872)(cid:1857)+(cid:1831)(cid:1876)(cid:1868)(cid:1857)(cid:1855)(cid:1872)(cid:1857)(cid:1856) (cid:1866)(cid:1858)(cid:1864)(cid:1853)(cid:1872)(cid:1867)(cid:1866), where. Where: (cid:1842)(cid:3043)(cid:3046): market price (or pv, (cid:1830)(cid:3043): dividend amount (pmt, (cid:1863)(cid:3043): required rate of return on preferred shares (discount rate) To determine the required rate of return: (cid:1863)(cid:3043)=(cid:1830)(cid:3043)(cid:1842)(cid:3043)(cid:3046) (cid:1863)(cid:3043)= (cid:887)(cid:889)(cid:882)=(cid:882). (cid:882)(cid:889)(cid:883)(cid:886)=(cid:889). (cid:883)(cid:886)% Ex: determine the required rate of return on preferred shares that provide a annual dividend if they are selling for . 7. 3 common share valuation: the dividend discount model (ddm) There is no requirement that common shares pay dividends at all. We must estimate the amount and timing of dividend payments. Dividend discount model (ddm): a model for valuing common shares that assumes they are valued according to the present value of their expected future dividends.