Question

In: Finance

"No buyer considers all securities equally attractive at their present market prices whatever these prices happen...

"No buyer considers all securities equally attractive at their present market prices whatever these prices happen to be; on the contrary, he seeks 'the best at the best price.'"

What does he mean?

"The investor must consider what return the stock might provide even if other investors never changed their mind about it. And that return can consist of nothing more than all the future cash flows paid by the company to its stockholders, out into the future as far as one can see."

What does he mean?

What is the Dividend Discount Model?
What are the challenges of the dividend discount model?
How does the model apply to stocks that pay no dividends?

How would it apply to Bitcoin?

Do you believe that growth stocks or value stocks are superior investments? Why?

Solutions

Expert Solution

Investors have a different evaluation of valuation of different securities and have a fair price in mind for every security and try to buy the stock at that price only. So it depends on the expectation of the investors only.

For the investor, the stock just like a bond in terms of valuation, it depends on the dividend and final payoff when they sold the stock in the market, so the price of the security depends on the future cash flows.

Dividend discount model suggests that price of the stock is equal to the present value of all the expected future dividends. The main challenge of the model is it couldn't be applied to the non-dividend paying stocks.

As bitcoin is the newer concept and doesn't have any underlying so it couldn't be valued as a stock or by dividend discount model.

Growth companies are the one that has shown better than average return in the past years while the value companies are the one with strong fundamentals. Value stocks are superior investments than the growth stocks due to higher valuations of growth stock due to investors expectation of continuing better than average performance which can be tumbled upon easily even by a single negative news


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