Why would two investors with different holding periods but the same expectations and required return for...

Why would two investors with different holding periods but the same expectations and required return for a company, arrive at the same intrinsic value of a common share of a company?

Solutions

Expert Solution

first of all lets underastand the meaning of the Intrinstic value of any security. the intristic value is the present value of the future cashflow on that particular security for example for the equity shares the present value of the share is equal to the present value of the dividend on that particular security as the equity is the security that is having an infinite maturity so the only cashflow reciened on equirt share is the dividend on such equityu shares what if we sell out that shares that price does not include nin the intrinstic value calculation because the sellibg price of share is the income for one investor while the investment for the another so the overall it does not have any impact on the total cashflow of the firm. so now its well understood that the intrinstic value of the equity share is the present value of the dividend on that share and does not consider the selling value of that stock so that means to calculate the present value of the equity we will calculate the present value of the future dividend and that dividend expectations will be equal for the investor having any horizon while the calculation of the value of equity share we are using the below mention formula;-

value of stock = Dividend/interest rate

the simply says the above formula is the present valuue perpatuity. so this valuation formula does not consider the investment horizon at all so there is no chance of intrinstic value is impact by the horizon of investment.

hence we can conclude that two investors with different holding periods will have same intrinstic value because the valuation formula does not consider the investment horizon at all.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Briefly discuss the 5 different interest rate levels required by investors in recent periods.

Required return of different maturities as well as different securities with the same maturity are different....

Required return of different maturities as well as different securities with the same maturity are different. Why? Explain your answer.

What would you estimate to be the required rate of return for equity investors

What would you estimate to be the required rate of return for equity investors if a stock sells for $40 and just paid a $4.40 dividend that is expected to grow at a constant rate of 5%?7.6%12.0%16.5%16.0%

Historically, investors holding corporate equities have earned a premium, or extra return for holding equities instead...

Historically, investors holding corporate equities have earned a premium, or extra return for holding equities instead of bonds. Economists have assumed that the equity premium, which has averaged about 7 percent during the post-Depression period, is a measure of the compensation that investors require for taking on the extra risk inherent in equity investments (stocks). Recently, there has been a significant decline in the equity premium on stocks. Between 1990 and 2000, the value of U.S. corporate equities rose 425...

Why would one lender charge different rates to different borrowers for the same loan? why would...

Why would one lender charge different rates to different borrowers for the same loan? why would two different lenders charge different rates to the same borrower for the same loan?

Assume that there two investments of different risk. A return of 0.05 is required on one...

Assume that there two investments of different risk. A return of 0.05 is required on one investment: on the other a return of 0.10 is required. Compare the present values obtained for each investment for expected cash flows of $1 billion 1 year, 20 years, and 50 years from now at the required rates of return.

Question