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The value of an asset is the present value of the expected returns from the asset during the holding period. An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the asset's present value. A dividend valuation model such as the following is frequently used:

Pi = D1 / (ki - gi) Where:
P1 = the current price of Common Stock i
D1 = the expected dividend in Period 1
ki = the required rate of return on Stock i
gi = the expected constant growth rate of
dividends for Stock i

problem: Identify the three factors that must be estimated for any valuation model, and describe why these estimates are more difficult to derive for common stocks than for bonds?

 

Basic Finance, Finance

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