EC223 Chapter Notes - Chapter 7: Efficient-Market Hypothesis, Making Money, Dividend Discount Model
Document Summary
Residual claimant: basically shareholders get the left over shit after all assets paid off. Value of investment is found by computing value of today of all cash flows. Buy a stock and hold it for one period and then sell the stock. Present value of stocks of future cash flows. Determined by present value only but not all pay stocks makes assumption dividends will be paid one day. Dividends assumed to be growing at a constant rate forever. Growth rate is assumed to be less than required return on equity: if not true firms will grow impossibly large. Price earnings ratio (pe): widely watched measure of how much the market is willing to pay for earnings from a firm. Expected to have same pe in long run. Market expects earnings to rise in future and will eventual return to normal pe level. Market feels firms earnings are low risk and people willing to pay premium for them.
