FIN 300 Chapter Notes - Chapter 8: Stock Valuation, Time Zero, Cash Flow
Document Summary
There are special circumstances where we can come up with a value for the stock. The three cases we consider are: (1)the dividend has a zero growth rate (2)the dividend grows at a constant rate (3)the dividend grows at a constant rate after some length of time. A zero growth share of common stock implies: Stock with dividends that grow at a constant rate forever is an example of a growing perpetuity. By using a constant growth rate, we are trying to estimate the expected average growth rate over a long period of time. As long as the growth rate g, is less than the discount rate, r, the present value of this series of cash ows can be written very simply using the growing perpetuity formula. Dividend growth model: a model that determines the current price of a stock as it its dividend next period, dividend by the discount rate less the dividend growth rate.