B6 - Financial Valuation

Question 1

Perpetuities

Answer 1

Perpetual Annuity

can be use to value Zero Growth Stock

Pay same dividend each period

Stock Price will not increase because dividend does not increase

Question 2

Constant Growth (Dividend Discount Model)

Answer 2

• P_{0 =} {Div₀ * (1+g) } / (r-g) = Future Dividend / (r-g)
• Assumes stock price will grow at the same rate as dividend
• Dividends are the cash flows of an equity security and that the intrinsic value of the company’s stock is the present value of the expected future dividends.

Question 3

P/E Ratio

PEG Ratio

Answer 3

P₀ / E₁

{P₀ / E₁} / G