In the last chapter we discussed the time value of money and explored the wonders of compound interest. We are now able to apply these concepts to determining the value of different securities. In particular, we are concerned with the valuation of the firm's long-term securities - bonds, preferred stock, and common stock (though the principles discussed apply to other securities as well). Valuation will, in fact, underlie much of the later development of the book. Because the major decisions of a company are all interrelated in their effect on valuation, we must understand how investors value the financial instruments of a company.
The rate of return that sets the discounted value of the expected cash dividends from a share of common stock equal to the share's current market price is the yield on that common stock.
If, for example, the constant dividend growth model was appropriate to apply to the common stock of a particular company, the current market price (P0) could be said to be
P0 = D1 / (ke − g) (4.26)Подробнее...