FIN 401 Chapter Notes - Chapter 8: Dividend Yield, World Oil Market Chronology From 2003, Stock Valuation
Document Summary
If you buy the stock today and sell it at the end of the year, you will have a total of in cash. Instead, suppose that we somehow knew the price in two periods, p2. Given a predicted dividend in two periods, d2, the stock price in one period would be. If we were to substitute this expression for p1 into our expression for p0, we would have: now we need to get a price in two periods. We don"t know this either, so we can procrastinate again and write: If we substitute this back in for p2, we would have: notice that we can push the problem of coming up with the stock price off into the future forever. Importantly, no matter what the stock price is, the present value is essentially zero if we push it far enough away.
