The Essentials of Financial Analysis by Samuel C. Weaver

Author:Samuel C. Weaver
Language: eng
Format: epub
Publisher: McGraw-Hill
Published: 2012-12-07T16:00:00+00:00

Constant growth:

where V0,r,∞ = value of firm at time 0 continuing perpetually

CF1 = cash flow at the end of year 11

r = cost of equity

g = constant growth

These basic models are at the heart of all equity securities. Later chapters will develop valuation models far beyond these conceptual but limited frameworks.

Although Hershey has no preferred stock outstanding, let’s assume that it does have a preferred stock share that pays $4 a year in dividends and that the appropriate market rate of required return is 8 percent. Equation (8.8), the value of a perpetuity without growth, provides the proper valuation model:

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