Business Finance Discussion Week 7

The correct statement is 4. All three should be willing to pay the same amount for the
stock regardless of their holding period. The current stock price is arrived at by summing the
ending stock price and the present value of dividends earned from the stock. Shareholders often
expect that dividends will be paid at the end of the year (D1). The dividend growth mole dos
used to calculate the fair value of a stock.
The formula is P = D 1 /(k e – g).
D 1 is the dividend the next year, while K e is the discount rate. On the other hand, g is the
annual growth rate in the dividend. The implication of this formula is that the stock price will be
similar for all three. The holding period plays no role in the determination of the stock price. As
a result, the correct answer is all people will be willing to pay a similar amount to the holding
period notwithstanding.
Reflection
The assignment expounds on the dividend growth model. The formula used is useful in
calculating the fair value of a stock. After calculating the fair value of a stock, investors can
determine whether the stock is undervalued or overvalued. To this end, I will be able to apply the
formula in the future to understand whether a stock is overvalued or undervalued. Investment
decisions can thereafter be made based on the conclusion. If stocks are overvalued, they are good
“sell” opportunities. On the other hand, if stocks are undervalued, they are good “buy”
opportunities.