FIN 300 1st Edition Lecture 14 Outline of Last Lecture I. BondsII. Federal Government BondsIII. Yield to Maturity (YTM)Outline of Current Lecture I. Dividend Discount Model II. Constant Dividend Growth Model III. Total Payout Model Current LectureCh. 7- Stock ValuationsDividend Discount ModelP0=D11+rE+D2(1+rE)2The value of stock today is based on the Present Value of its price and dividend one period fromnow.rE = Equity cost of capital (the return an investor earns from the dividend).Constant Dividend Growth ModelWhat if we hold the stock forever? The price of the stock is equal to the present value of all of the expected future dividends it will pay.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.We don’t know all of the future dividends of a firm so instead we often assume constant growthof dividends. P0=D1rE−g OR Pn=Dn+1rE−gNote: Comparing this to the components of the dividend yield and the capital gain rate, we see that g is equal to the capital gain rate. With constant expected dividend growth, the expected growth rate of the share price matches the growth rate of the dividend.Total Payout ModelP0=PayoutsrE−gShares OutstandingHere, PV (Future Total Dividends & New Repurchases) = PV (payouts) = PayoutsrE−gNote: This assumes constant growth of
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