EC223 Chapter Notes - Chapter 7: Dividend Discount Model, Market Price, Efficient-Market Hypothesis
Document Summary
Price of a stock should be calculated in present value so you know whether or not it"s worth it to buy. You compare the price right now, with how much money you expect to make from it in the future (called future cash flows) (all future dividends combined + sales price) Generalized dividend model po = dt / (1 + ke)t. This model calculates future cash flows without the sales price, because sales price in the future (like 75 years from now) is very little. The generalized dividend model is simplified to the: 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 = most recent dividend paid g = expected constant growth rate in dividends. Ke = required return on an investment on equity. For this model, we assumed that dividends are going to continue to grow at a constant rate forever.
