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Closed-Form Stock Price Models

Published online by Cambridge University Press:  19 October 2009

Harold Bierman Jr ,
David H. Downes  and
Jerome E. Hass
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Extract

In a previous paper we reviewed the literature on normative stock price models. These models specified the present value of a share of common stock to be equal to the discounted value of dividends accruing to the holder. Using continuous discounting, the present value of a share is(1)

where Dt is the dividend rate at time t and k is the cost of equity capital. Presumably k is a function of both the stockholders' time value of money and the perceived risk or uncertainty associated with the future dividend stream.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 7 , Issue 3 , June 1972 , pp. 1797 - 1808
Copyright
Copyright © School of Business Administration, University of Washington 1972

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References

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