Stock valuation
There are several ways to estimate the price of a stock. One method is called the dividend discount model. The logic is that the price of a stock today is simply the summation of the present value of all its future dividends. Let's use the simplest one period model to illustrate. We expect a $1 dividend at the end of one year and its selling price is expected to be $50. If the appropriate cost of equity is 12%, what is the price of stock today? The timeline and future cash flows are shown here:
The price of stock is simply the present values of those two future cash flows, $45.54:
>> (1+50)/(1+0.12) >>> 45.535714285714285 >>> import ...
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