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Chapter 7

EC223 Chapter Notes - Chapter 7: Dividend Discount Model, Market Price, Efficient-Market Hypothesis


Department
Economics
Course Code
EC223
Professor
Sharif Khan
Chapter
7

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Chapter 7 – The Stock Market


 !
"!
Generalized Dividend Model Po = Dt / (1 + Ke)t
# 
$%!
#&'( )
Gordon Growth Model Po = (Do x (1 +g))/(Ke – g) = D1 / (Ke – g)
Use this Model if growth in Dividends is constant (more theoretical)
Do *+
g*,
Ke = -..
/

#&&+ 
 
Price-Earnings Ratio
01 
Use this Model if growth is not constant (more applicable)
P = (P/E x E) Stock Price = PE ratio x Expected Earnings per Stock
2,)
1 3,#
,
4 3, 

How the Market Sets Stock Prices
1 +5

4 +
6 
7**
8 


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