1. Corporate Finance Unit 3 Valuating Stocks and Bonds Valuing shares:Constant dividends Andrew Hingstonandrew.hingston@agsm.edu.au
2. 2 Value of shares The value of any financial asset is the present value of cash flows that you expect to receive. The main cash flow from holding shares are future dividends Dividends = cash distributions of profits to shareholders. The value of a share is the present value of future dividends. 2
3. 3 Constant dividends(Perpetuity) If a firm pays constant dividends thenthe shares can be valued as a perpetuity. The present value (A) will be the valueof the shares (P0 in course notes) regular identical cash flows (R) will be theconstant dividends (d in course notes) with a required return of reper period
4. 4 Example How much would Susan pay for a share that is expected to pay a dividend of $1 per year forever given that the share is expected to return an average of 9% pa?Answer $11.11 1 0.09 =
