Kapitel 9 Flashcards
What does the law of one price say?
The value of any security is the value of the expected cash flows received from owning it.
What is the implication of the law of one price?
The valuation of a stock will not be dependent on the investment horizon.
What are the cash flows from owning a stock=
Dividends, selling the shares
What is the price at which shares are sold?
The PV of future dividends and price.
What is the discount rate for the PV in the dividend discount model?
The equity cost of capital, rE
What is the dividend yield of a stock?
The percentage return the investor expects to earn from the dividend paid by the stock. (Div1/P0)
What is the capital gain rate?
The difference between selling price and purchase price as a percentage of the purchasing price.
How can the equity cost of capital be calculated?
The sum of the dividend yield and the capital gain rate.
What would happen id the return is higher than what investors could get elsewhere?
Other would buy it and the price would increase until it hold that the expected rE equals the sum of dy and capital gain.
How do you calculate price and rE with constant dividend growth? (dividend discount model)
P0 is calculated lika a normal perpetuity.
rE= dividend yield + growth rate
What is the trade-off when increasing the share price?
Growth (investment) or increasing dividends
What is the dividend payout rate?
The fraction of its earnings that the form pays as dividends.
How is the dividend calculated in the dividend discount model?
Divt= EPSt x DPRt
What is the retention rate?
The fraction of current earnings that the firm keeps.
Change in earnings
New investment x return on investment
