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Pascal PIERRE edited section_textit_DDM_textit_RIM__.tex
almost 8 years ago
Commit id: 172e9b2ee7c1d62da0b1b062a1ef9d1be384bd92
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Applying equation (1) to equities leads to
\begin{equation}
P_{t}=\displaystyle\sum_{i=1}^{K}\frac{D_{t+i}}{(1+R)^i}+P_{t+K} P_{t}=\displaystyle\sum_{i=1}^{K}\frac{D_{t+i}}{(1+R)^i}+\frac{P_{t+K}}{(1+R)^K}
\end{equation}
where $P_{t}$ is the stocks price at $t$, $D_{t+i}$ the future dividend at $t+i$, $R$ the discount rate and
$P_{t+K}$ the terminal value. Again, $R$ is necessarely the average total return of the shareholder over one period if he pays $P_{t}$, receive $D_{t+1}$,$D_{t+2}$, . . . $D_{t+K}$ and sells the stock at $P_{t+K}$. It is worth mentioning that the dividends are always reinvested and that the total shareholder return is going to be $(1+R)^K-1$ over $K$ periods.