Stock evaluation

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  • Common stock evaluation: The price of the stock today is really just the present value of all expected future dividends
    • CSE using DIscount Dividend Model
      • Scenario 1: Constant Dividend: The firm will pay a constant dividend forever and The price is computed using the perpetuity formula: P0 =D/(Ks-g)
      • Scenario 2: Constant Growth of Dividend: The firm will increase the dividend by a constant percent every period: Dt = D0 (1+g)t
      • Nonconstant Growth: Dividend growth is not consistent initially, but settles down to constant growth eventually: P0=D1/(k-g)

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