Stock valuation
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Scenario: Bobbie B. Beebee and I are looking at AT&T's stock because we are both very wealthy stock market investors. We usually spend summers together in the Swiss Alps (at his expense....you see, he likes me and we are pals). We agree on the expected dividend AT&T will be paying. For your information, BBBBB (that's what all his closest friends call him) has come up with an ironclad formula for projecting future dividend growth. He has franchised this information and made over $50 million on the formula in the last four years. We also agree on the level of risk for the stock ( I had to buy this formula from him also). I hold my stock for two years because of my advancing age (I am presently older than rope).
Bobbie B. holds his stock for 10 years (because he is a younger whipper-snapper). The question is, should we or should we not pay the same price for the stock? Why or why not? (I've got to make more than he does this year).
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Solution Summary
The solution explains whether stock price should depend on the holding period of the stock.
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Both should pay the same price of the stock since the price is the present value of all dividends and both agree on the growth rate in dividends and the discounting rate (since both agree on the risk also)
Using the dividend discount model
Price= D1/(Required return - Growth Rate)
Both persons agree on D1, required return and growth rate but have a different holding period
First ...
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