Fin 515

Fin 515 Week 4 Discussion Part 1

Capital gains yield is calculated by taking the current selling price of a security and subtracting the original price then dividing by the original price:

Capital Gains Yield= P1-P0/P0

Capital gains yield is used to calculate the change of a stock value, so a higher selling price of a stock will result in a higher capital gains yield.

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A firm's common stockholders have the right to elect its directors, who, elect the officers who manage the business. Common stockholders often have the right (preemptive right), to purchase any additional shares sold by the firm. The preemptive right enables current stockholders to maintain control, and it also prevents a transfer of wealth from current stockholders to new stockholders (p.269).

The dividend valuation model is the value of a common stock is equal to the present value of all future dividend payments discounted at the investor’s required rate of return. The considerations associated with the valuation process are: the estimated selling price at the anticipated date of sale of the stock and the estimated selling price at the anticipated date of sale of the stock.

In the constant growth dividend valuation model, the value of a common stock is equal to the next period’s dividend divided by the difference between the investor’s required rate of return and the dividend growth rate. Constant dividend growth models assume that dividends will grow at a constant rate for an infinite period.The the estimated stock value equals D/(r - g), where D is the estimate of next year's dividend, r is the required rate of return and g the dividend growth rate. The constant growth model is applicable in the valuation process when viewing a holding period of a relatively longer horizon. The constant growth model gives simplicity to the valuation of common stock. The rate of growth is expected to change with time, instead of remaining constant....