MGT 181 Chapter Notes - Chapter 8: Preferred Stock, Common Stock, Ask Price
6 May 2019
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The price of a stock today is equal to the pv of all future dividends. But dividends can be given into perpetuity . Preferred stock has zero growth so the dividends are always constant and some kinds of common stock act this way as well. The dividend grows at a steady rate. A model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate. Stock price at any point in time. If the growth were greater than the discount rate, the stock price becomes infinitely large. The present value of the dividends get larger and larger. The answers we get from the dividend growth model mean nothing if the discount rate is smaller than the growth rate. You have a stock that isn"t paying dividends but you assume in 5 yrs it will start paying dividends. Calculate the price of the dividends in 4 yrs.
