7  Valuation

This is a book containing all class notes.

The current price of a stock given dividends paid and price can be calculate as follows.

\[ P0 = \frac{Div_1}{(1+r)^1} + \frac{Div_2}{(1+r)^2}+...+\frac{Div_t}{(1+r)^t} \]

Over time, it is easy to see that the relative importance of \(P_t\) goes to zero, while the relative importance of the sum of \(div\) goes to 1.

That is why there is no \(P_t\) in the formula above.

The intuition is: the current price of a stock depends only on the future dividends that investors will receive.