TEST OF A STOCK VALUATION MODEL

TEST OF A STOCK VALUATION MODEL Po = Po + J.lo. (1) Normal price is viewed as the present value of dividends expected in each period, De, to some horizon, n, plus the present value of the share price expected at the horizon, Pn. The discount rate, r, is assumed to be constant and to include an appropriate premium for risk. The basic model is the same as that suggested by Williams [7] and used by so many others: P _ 0- D1 (1 D Dt D +P + r) + (1 + r)2 + ... + (1 + r)t + ... + (1 + r)n' n n (2) This model provides the variables to be estimated and the ideas to be tested. Dividends depend on earnings and on payout policies. If investors consider that earnings will grow at a constant rate to the horizon and look upon the corporation's dividend payout decision as Lintner [4] did, then their dividend expectations will depend (1) on their estimates of normal or noiseless earnings in the period just past, Eo, (2) on earnings growth rate to the horizon, g, (3) on • The authors are Special Consultant on Applications Programming and Professor of Business Economics, respectively, http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

TEST OF A STOCK VALUATION MODEL

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Publisher
Wiley
Copyright
1970 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1970.tb00672.x
Publisher site
See Article on Publisher Site

Abstract

Po = Po + J.lo. (1) Normal price is viewed as the present value of dividends expected in each period, De, to some horizon, n, plus the present value of the share price expected at the horizon, Pn. The discount rate, r, is assumed to be constant and to include an appropriate premium for risk. The basic model is the same as that suggested by Williams [7] and used by so many others: P _ 0- D1 (1 D Dt D +P + r) + (1 + r)2 + ... + (1 + r)t + ... + (1 + r)n' n n (2) This model provides the variables to be estimated and the ideas to be tested. Dividends depend on earnings and on payout policies. If investors consider that earnings will grow at a constant rate to the horizon and look upon the corporation's dividend payout decision as Lintner [4] did, then their dividend expectations will depend (1) on their estimates of normal or noiseless earnings in the period just past, Eo, (2) on earnings growth rate to the horizon, g, (3) on • The authors are Special Consultant on Applications Programming and Professor of Business Economics, respectively,

Journal

The Journal of FinanceWiley

Published: May 1, 1970

References

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