Chapter 7b Flashcards
(13 cards)
equation for the PV of a perpetuity (or a stock with zero growth in dividends)
Payment/Rate
Dividends/(Rate-Growth)
equation for amount of a dividend in t periods for a constant growth dividend paying stock
current dividend * (1+growth rate)^t
Dividend growth model equation if growth rate is less than discount rate
Pt = Dt+1/(R-g)
Equation for value of stock in t periods
P0 * (1+g)t
Dividend growth model
A model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate.
Dividend Yield
A stock’s expected cash dividend divided by its current price.
Capital gains yield
The dividend growth rate, or the rate at which the value of an investment grows.
Anticipated price of stock equation
Price at time t = Benchmark PE ratio x EPS at time t
Book value per share equals
total common equity/total common shares outstanding
P0
Price of a stock which equals the present value of expected future cash flows discounted at the required rate of return (R) by investors or the market.
Expected total return (R) equation
R = dividend yield + g
R = D1/P0 + g
CAPM equation
Required Return of an Asset=Risk-free rate + (Market return - risk-free rate)beta
What shares to use when calculating sales/share or price/share
common basic shares (not diluted)
