Textbook Notes (368,588)
Canada (161,988)
Economics (1,074)
EC223 (81)
Chapter 7

Chapter 7 EC223.docx

2 Pages
58 Views
Unlock Document

Department
Economics
Course
EC223
Professor
Angela Trimarchi
Semester
Winter

Description
EC223 Chapter 7 – Stocks, Rational Expectations, and the Efficient Market Hypothesis Week 7 Computing the Price of a Common Stock -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 The One-Period Valuation Model -To value the stock today, you need to find the present discounted value of the expected cash flows P0= Div 1 + P1_____ (1+k e (1 +ke) 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 Generalized Dividend Valuation Model -The one-period valuation model can be extended to any number of periods -The generalized dividend model is as follows: P0 = Sum of D n__ (1 +ke)t -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 -The generalized dividend valuation model requires that we compute the present value of an infinite stream of dividends, a process that could be difficult The Gordon Growth Model -Assumes constant dividend growth P0= D 0 (1 + g) = D 1_ (ke– g) (ke– g) D 0 the most recent dividend paid g = the expected constant growth in dividends ke= the required return on an investment in equity -This model is useful for finding the value of stock given a few assumptions: 1. Dividends are assumed to continue growing at a constant rate forever 2. The growth rate is assumed to be less than the required return on equity, k e Price Earnings Valuation Method -Awidely watched measure of how much the market is willing to pay for $1 earnings from a firm -A high PE has two interpretations: 1. A higher than average PE may mean that the market expects earnings to rise in the future. This would return the PE to a more normal level 2. A high PE may alternatively indicate that the market feels the firm’s earnings are very low risk and is therefore willing to pay a premium for them P x E = P E -Firms in the same industry are expected to
More Less

Related notes for EC223

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit