Chapter 8 Flashcards
the life of the common stock investment is
essentially forever bc common stock has no maturity
Pꜜ0 =
the current price of the stock
Pꜜ1 =
(Cash flows)
the price of the stock in one period
D1=
(Cash flows)
the cash dividend paid at the end of one period
R=
(Cash flows)
the required return in the market on this investment
Cash flows formula for
Pꜜ0 =
Pꜜ0 =
(Dꜜ1 + Pꜜ1) / (1 + R)
price of stock =
(cash flows)
its present value
if the dividend is alwasy the same, the stock can be viewed as an ordinary perpetuity with a cash flow equal to D every period
zero growth
Pꜜ0 =
(zero growth)
formula
Pꜜ0 =
D / R
(the stock can be viewed as an ordinary perpetuity)
(AKA: present value of a perpetuity = payment / interest rate
a model that determines the current price of stock as its dividend next period dividend by the discount rate less the dividend growth rate
Dividend growth model
g =
(dividend growth model)
growth rate (must be less than the discount rate)
Dꜜ0 =
(dividend growth model)
the dividend just paid
Dꜜ1 =
(dividend growth model)
the next dividend
Pꜜ0 =
(dividend growth model)
formula
Pꜜ0 =
Dꜜ1 / (R - g)
(can be used to find the stock price at any point in time)
(AKA: Pꜜt = Dꜜt-1 / (R - g)
- 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
Nonconstant growth
- 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
two stage growth
- 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
less than the required return
R =
(components of the required return)
the required return, or discount rate
in the dividend growth model, R =
formula
R = (Dꜜ1 / Pꜜ0) + g
R has two components in the components of the required return
- Dꜜ1 / Pꜜ0 / dividend yield
- g / capital gains yield
Dꜜ1 / Pꜜ0 in components of the required return is
the dividend yield
a stocks expected cash dividend divided by its current price
dividend yield
g in components of the required return is
capital gains yield
the divdend growth rate, or the rate at which the value of an investment grows
capital gains yield
required return =
(components of the required return)
dividend yield + capital gains yield
the ratio of a stocks price per share to its earnings per share (EPS) over the previous year
Price to earnings (PE) ratio
Price at time t =
(Price to earnings (PE) ratio)
Price at time t =
benchmark PE ratio * EPSꜜt
A PE ratio that is based on estimated future earnings
Forward PE ratio
Price at time t =
(forward PE ratio)
price at time t =
benchmark PE ratio * EPSꜜt+1
dont look at difference in stocks besided something and common
if in book and not in lecture or recitation dont worrya bout it
