CHAPTER 9 VALUATION OF COMMON STOCKS. The Discounted Dividend Model (DDM) is defined as any model that computes the value of a share of stock as the present.

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Presentation transcript:

CHAPTER 9 VALUATION OF COMMON STOCKS

The Discounted Dividend Model (DDM) is defined as any model that computes the value of a share of stock as the present value of its expected future cash dividends.. – Now, suppose ROE = k, or the return on equity equals the risk-adjusted cost of capital.

Problem 1

Problem 2

P 0 = 11.17

Answer to Problem 12

Stock Dividends

Stock Splits

Answer to Problem 11 In 1961, Modigliani and Miller presented an argument to prove that in a frictionless financial environment, in which there are no taxes and no costs of issuing new shares of stock or repurchasing existing shares, a firm’s dividend policy can have no effect on the wealth of its current shareholders. Issues of taxes on dividends paid out, laws preventing share repurchase as a regular alternative to cash dividends, investment bankers’ fees for arranging external financing, etc., all make dividend policy relevant.