Chapter 8 Flashcards
1
Q
a model that determines the current price of stock as its dividend next period dividend by the discount rate less the dividend growth rate
A
Dividend growth model
2
Q
g =
A
growth rate (must be less than the discount rate)
3
Q
A
4
Q
A
5
Q
A
6
Q
- allows for supernormal growth rates over some finite length of time
- requires the assumption that dividends start growing at a constant rate sometime in the future
- future stock price falls one period before the constant growth begins
- could have zero or uneven dividends for a certain time period prior to constant growth
A
Nonconsnstant growth
7
Q
- assumes the dividend will grow at a certain rate for certain numbers of years and then grow at another thereafter and forever
- future stock price falls one period before the second stage of growth begins
A
two stage growth
8
Q
- in the first stage of growth, the growth rate can be greater than the required return.
- in the second stage of growth, the growth rate must be
A
less than the required return
9
Q
R =
(components of the required return)
A
the requitred return, or discount rate
10
Q
in the dividend growth model, R =
A
R = Dꜜ1 / Pꜜ0 + g
11
Q
R has two components
A
- dividend yield
- capital gains yield
12
Q
Dꜜ1 / Pꜜ0 is
A
the dividend yield
13
Q
A
14
Q
A
15
Q
A
16
Q
the ratio of a stocks price per share to its earnings per share (EPS) over the previous year
A
Price to earnings (PE) ratio
17
Q
Price at time t =
(Price to earnings (PE) ratio)
A
Price at time t = benchmark PE ratio * EPSꜜt
