ECO349H5 Chapter Notes - Chapter 7: Dividend Discount Model, Rational Expectations, Efficient-Market Hypothesis
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Chapter #7 - stock market, theory of rational expectations, and. Stockholders - those who hold stock in a company. Common stock is the principal medium through which corporations raise equity capital. Residual claimant - stockholder receives whatever remains after all other claims agai(cid:374)st the fi(cid:396)(cid:373)"s assets ha(cid:448)e (cid:271)ee(cid:374) satisfied. Board of directors set levels of dividends. Value of investment is calculated by computing present value of all cash flows the investment generates. D1 = dividend paid at year 1 k = required rate of return. P1 = price at end of year 1. If your value is larger than current price you will buy. If it is less you will not buy. Using present value model you can extend it to model any amount of periods using dividend streams. However you can remove the pn if it is the distant future and therefore it becomes the following.
