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The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital gain. The actions of the marginal investor determine the equilibrium stock price. Market equilibrium occurs when the stock's price is -Select- its intrinsic value. If the stock market is reasonably efficient, differences between the stock price and intrinsic value should not be very large and they should not persist for very long. When investing in common stocks, an investor's goal is to purchase stocks that are undervalued (the price is -Select- the stock's intrinsic value) and avoid stocks that are overvalued. The value of a stock today can be calculated as the present value of -Select- stream of dividends:

Respuesta :

Answer:

marginal investor

equal

less

infinite

Explanation:

the value of a stock depends on the sum of the value of the dividend yield and capital gains yield

dividend yield = dividend / price of the stock

capital gains yield is a change in the value of the stock as a result of appreciation in the value of the stock.

The intrinsic value of a stock can be calculated using various dividend models. some of them include :

  1. The Gordon constant growth dividend model
  2. The two stage dividend growth model
  3. The H-model
  4. The three stage dividend growth model

The market is in equilibrium when price equal intrinsic value

a stock is undervalued when the price of the stock is less than its intrinsic value

A stock is overvalued when the price of the stock is greater than its intrinsic value.

An investor would want to purchase a stock that is undervalued so that they can take advantage of increase in the value of the stock

Th dividend used to calculate the intrinsic value is infinite. This is because dividends are paid infinitely as long as the investor holds the stock and the company exists

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