Test Bank for Corporate Finance, 5th Edition by Jonathan Berk, DeMarzo Chapter 1-31 A++
UPDATED Finance 1 for Business Summary
Test Bank For Corporate Finance The Core, 5th Edition by Jonathan Berk, Peter DeMarzo Chapter 1-19
All for this textbook (72)
Written for
Erasmus Universiteit Rotterdam (EUR)
Economics
ECB204
All documents for this subject (9)
Seller
Follow
notesonline
Content preview
Chapter 9: Valuing Stocks
9.1 The Dividend-Discount Model
● One-Year Investor
○ There are two potential sources of cash flows from owning a stock
■ They might pay out cash to its shareholders in the form of a dividend
■ The investor might generate cash by choosing to sell the shares at some
future date
○ The present value of stocks is calculated using the equity cost of capital rE which
is the expected return of other investments available in the market with
equivalent risk to the firm’s shares.
○ Buying or selling a stock must be a zero-NPV investment opportunity.
● Dividend Yields, Capital Gains, and Total Returns
○ The dividend yield is the expected annual dividend of the stock divided by its
current price.
■ The dividend yield is the percentage return the investor expects to earn
from the dividend paid by the stock
DIV1 / P0
○ The capital earned is what the investor will earn on the stock, which is the
difference between the expected sale price and purchase price for the stock, P1 -
P0.
■ This is divided by the current stock price to express a percentage known as
the capital gain rate.
p1 - p0 / P0
, ○ The total return is the sum of the dividend yield and the capital gain rate and is
the expected return that an investor will earn for a one-year investment in the
stock.
○ The expected total return of the stock should equal the expected return of other
investments available in the market with equivalent risk.
■ If a stock offers a higher return than other equally risky investments,
people will buy the stock.
■ If a stock lowers its expected return, investors will sell the stock.
● A Multiyear Investor
● The Dividend-Discount Model Equation
○ This equation holds true for a single N-year investor, who will collect dividends for
N years and then sell the stock
○ The price of the stock is equal to the present value of the expected future
dividends it will pay.
9.2 Applying the Dividend-Discount Model
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller notesonline. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.16. You're not tied to anything after your purchase.