FIN 300 Chapter Notes - Chapter 8: Cash Cow, Activist Shareholder, Double Taxation
14 Jan 2016
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P0 = (d1 + p1) / (1 + r) Where p0 = the value of a share of stock today/current price of the stock. Where p1 = price of stock in a defined number of periods. Where d1 = the cash dividend paid at the end of each period. P0 = [d1 / (1+r)] + [d2 / (1 + r)2] + [p2 / (1 + r)2] This can be done for an unlimited number of periods. No matter what the stock price is, the pv is essentially zero if we push it far enough away. Therefore, the price of the stock today is equal to the pv of all the future dividends. Constant growth: dt = d0 * (1 + g)t. Where t = number of periods: a stock with dividends growing at a constant rate forever is an example of a growing perpetuity.
