Why will a short-term and long-term investor with the same beliefs be willing to pay the...

Why will a short-term and long-term investor with the same beliefs be willing to pay the same price for a stock?

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Expert Solution

Because the value of the stock at any point in time is equal to the present value of the future dividends from that point on. Thus, the value of the stock to an investor who plans to hold on to the stock indefinitely, an investor who will collect dividends for N years and then sell the stock, or to a series of investors who hold the stock for shorter periods and then resell it are all the same. Thus, all investors (with the same beliefs) will attach the same value to the stock, independent of their investment horizons. How long they intend to hold the stock and whether they collect their return in the form of dividends or capital gains is irrelevant.

jeff jeffy answered 2 years ago

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