Finance School of management Does the trading behavior affect the stock price uesTc
11 Finance School of Management Does the trading behavior affect the stock price？
Finance School of management Suppose that an investor buys one stock from the beginning and sells it at time twith the selling price PTo From the ddm, we have 0=∑ 7、1 (1+k)(1+k) and (1+k) Therefore D + (1+k)z(1+k)(1+k) The trading behavior has no effect on stock price. uesTc 12
12 Finance School of Management Suppose that an investor buys one stock from the beginning and sells it at time T with the selling price PT 。From the DDM, we have： 0 1 (1 ) (1 ) T t T t T t D P P = k k = + + + and (1 ) t T t t T D P k = = + Therefore 0 1 1 (1 ) (1 ) (1 ) T t t t t t t t t T t D D D P k k k = = = = + = + + + The trading behavior has no effect on stock price
Finance School of management The Constant-Growth-Rate Discounted Dividend model a The most basic assumption is that dividends will grow at a constant rate g a Substituting the dividend growth forecast, DiD(1+g)-, into DDM formula, we find that the present value of a perpetual of dividends growing at a constant rate, 8, is k uesTc 13
13 Finance School of Management The Constant-Growth-Rate, Discounted Dividend Model ❑ The most basic assumption is that dividends will grow at a constant rate g. ❑ Substituting the dividend growth forecast, Dt =D1 (1+g) t-1 , into DDM formula, we find that the present value of a perpetual of dividends growing at a constant rate, g, is 1 0 D P k g = −
Finance School of management IBM Stock is expected to pay a dividend of s3 per share a year from now, and its dividends are expected to grow by 8% per year thereafter. If its price is now $30 per share, what must be the market capitalization rate? 30 k-0.09>>k=0.18 uesTc 14
14 Finance School of Management IBM stock is expected to pay a dividend of $3 per share a year from now, and its dividends are expected to grow by 8% per year thereafter. If its price is now $30 per share, what must be the market capitalization rate? 3 30 0.18 0.08 k k = = −
Finance School of management The Constant-Growth-Rate Discounted Dividend model a If g equals to zero(D=D2=.), the formula reduces to the formula for the present value of a level perpetuity: 0 (1+k)k uesTc 15
15 Finance School of Management The Constant-Growth-Rate, Discounted Dividend Model ❑ If g equals to zero(D1=D2=…), the formula reduces to the formula for the present value of a level perpetuity: 1 1 0 1 (1 )t t D D P k k = = = +