The value of an asset is the present value of the expected returns from the asset during the holding period. An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the asset's present value. A dividend valuation model such as the following is frequently used:
Pi = D1 / (ki - gi) Where:
P1 = the current price of Common Stock i
D1 = the expected dividend in Period 1
ki = the required rate of return on Stock i
gi = the expected constant growth rate of
dividends for Stock i
Question: Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds?
The 3 factors are D1, ki, gi. D1 is harder for stocks than bonds because dividends can be changed whereas when a bond is issued it will pay its stated interest ...
The solution discusses the estimating factors for a valuation model.