COMMERCE 2FA3 Chapter Notes - Chapter 5: Risk Premium, Interest Rate Risk, Futures Contract
6 Apr 2017
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Document Summary
Financial markets facilitate the transfer of funds from surplus units to deficit units. Preferred shares: have fixed dividends that normally must be declared and paid before common shareholders receive anything, but their omissions due to distress does not constitute default. A share today is worth what you expect to receive at a future date; the expected dividend (d1), plus what you expect to sell the stock for at that time (p1). Because this sum is a future value it must then be discounted back at the required return on the stock (ke). This discount rate comes from models such as capm. When you attempt to use this formula to estimate the value of a stock further down the line than a single period it becomes an indefinite series of addition, the following is the resulting equations. This is known as the dividend discount model (ddm).
