EC223 Chapter Notes - Chapter 7: Arbitrage, Dividend Discount Model, Efficient-Market Hypothesis
Document Summary
P0 = div1 + p1_____ (1+ke) (1 +ke) Common stock if the principal way that corporations raise equity capital. This ownership interest gives shareholders a bundle of rights. Dividends are payments made periodically, usually every quarter, to stockholders. To value the stock today, you need to find the present discounted value of the expected cash flows. P0 = the current price of the stock. Div1 = the dividend paid at the end of the year ke = the required return on investments in equity. P1 = the price at the end of the first period; the assumed sales price of the stock. The one-period valuation model can be extended to any number of periods. Buyers of the stock expect that the firm will pay dividends someday. Most of the time a firm institutes dividends as soon as it has completed the rapid growth phase of its life cycle.