Question
a. An equity is a claim to a stream of future dividends. Suppose that dividends grow at a constant rate g and are discounted at
a. An equity is a claim to a stream of future dividends. Suppose that dividends grow at a constant rate g and are discounted at a constant rate r, with r>g. There is no uncertainty. The price of the equity is the present discounted value of this dividend stream. What is the price-dividend ratio?
b. what happens to the price-dividend ratio when there is a permanent increase in r? How about when there is a permanent increase in g? Briefly provide economic intuition for each.
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Fundamentals of corporate finance
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates
2nd Edition
978-0470933268, 470933267, 470876441, 978-0470876442
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