2.5-2.7 Share Valuation

Question 1

What is share valuation?

Answer 1

• investors INJECT capital in the form of EQUITY (capital) to a particular company in return for shares
• these shares are expected to pay dividends for free
• but “what is the value of a share to investors?”
• share valuation is simply finding the value of a share for an investor
  => Sum of PV of all cash flows

Question 2

What is zero growth?

Answer 2

When the dividends paid are the same in each period

- Value - D0/R

Question 3

What is constant growth (growing perpetuity)

Answer 3

• value of dividend paid increases over time

- assuming infinite periods, V= D0(1+g)/(R-g) when R>g