Two investors are evaluating General Electrics stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the risk of the stock. However, one investor normally holds stocks for 2 years and the other normally holds stocks for 12 years.

Should both be willing to pay the same price for General Electric?s stock? True or false? Explain.

Investors do not always agree on the required return on a stock. Every investor may have a different opinion of the stocks risk and require a different rate of return. The cost of equity for the firm is determined by the aggregate opinion of the market.

Both investors should be willing to pay the same price because the present value of all stock payments to the two investors are the same.

For one of the investors, the stock price today is worth the expected value of the first 12 dividends plus the stock price in 12 years:

eqP_0=\fracD_11+r+\fracD_2(1+r)^2+\fracD_3(1+r)^3+\fracD_4(1+r)^4+\fracD_5(1+r)^5+\fracD_6(1+r)^6+\fracD_7(1+r)^7+\fracD_8(1+r)^8+\fracD_9(1+r)^9+\fracD_10(1+r)^10+\fracD_11(1+r)^11+\fracD_12(1+r)^12+\frac1(1+r)^12*P_12\\ P_0=\fracD_11+r+\fracD_2(1+r)^2+\fracD_3(1+r)^3+\fracD_4(1+r)^4+\fracD_5(1+r)^5+\fracD_6(1+r)^6+\fracD_7(1+r)^7+\fracD_8(1+r)^8+\fracD_9(1+r)^9+\fracD_10(1+r)^10+\fracD_11(1+r)^11+\fracD_12(1+r)^12+\frac1(1+r)^12*\fracD_13r-g\\ /eq

For the second investor the stock price today is the value of the first 2 dividends plus the stock price in 2 years:

eqP_0=\fracD_11+r+\fracD_2(1+r)^2+\frac1(1+r)^2*P_2\\ P_0=\fracD_11+r+\fracD_2(1+r)^2+\frac1(1+r)^2*(\fracD_31+r+\fracD_4(1+r)^2+\fracD_5(1+r)^3+\fracD_6(1+r)^4+\fracD_7(1+r)^5+\fracD_8(1+r)^6+\fracD_9(1+r)^7+\fracD_10(1+r)^8+\fracD_11(1+r)^9+\fracD_12(1+r)^10+\frac1(1+r)^10*\fracD_13r-g)\\ P_0=\fracD_11+r+\fracD_2(1+r)^2+\fracD_3(1+r)^3+\fracD_4(1+r)^4+\fracD_5(1+r)^5+\fracD_6(1+r)^6+\fracD_7(1+r)^7+\fracD_8(1+r)^8+\fracD_9(1+r)^9+\fracD_10(1+r)^10+\fracD_11(1+r)^11+\fracD_12(1+r)^12+\frac1(1+r)^12*\fracD_13r-g\\ /eq

As the expressions above, show, the stock is worth the same amount of money to both investors. It does not matter when the stock is sold. Its price today is the present value of all payments from now to infinity.

Portfolio Weight, Return & Variance: Definition & Examples

Required Rate of Return (RRR): Formula & Calculation

Capital Asset Pricing Model (CAPM): Definition, Formula, Advantages & Example

The Agency Problem in Finance: Definition & Examples

Systematic & Unsystematic Risk: Definition & Examples

How to Calculate Yield to Maturity: Definition, Equation & Example

Holding Period Return (HPR): Formula & Examples

What is Working Capital Management? – Definition & Examples

How to Calculate the Return on Equity: Definition, Formula & Example

Present and Future Value: Calculating the Time Value of Money

Coupon Rate: Definition, Formula & Calculation

How to Calculate the Rate of Return: Definition, Formula & Example

Activity-Based Costing: Definition, Formula & Examples

How to Calculate Earnings Per Share: Definition & Formula

How to Calculate Payback Period: Method & Formula

Return on Investment: Definition, Formula & Example

Focus on Personal Finance: Online Textbook Help

DSST Money & Banking: Study Guide & Test Prep

Special Enrollment Examination (SEE): Exam Prep & Study Guide

UExcel Principles of Finance: Study Guide & Test Prep

Introduction to Financial Accounting: Certificate Program

Financial Accounting: Skills Development & Training

UExcel Financial Accounting: Study Guide & Test Prep

Introduction to Political Science: Help and Review

Explore our homework questions and answers library

My child is studying for a credit granting exam

-1 action=/academy/plans.html role=form form__teacher-subject class=item data-helper-text=1 data-show-reactivate=1 autocomplete=on data-cname=fields_teacher_subject data-track-visible test-id=fields_teacher_subject name=forms.teacherSubjectForm ng-submit=\$event.preventDefault(); validateDropdownForm(forms.teacherSubjectForm, forms.teacherSubjectForm.teacherSubject)

1 ng-bind=(cart.product.billingIntervalCount) +

Watch 5 minute video clips, get step by step explanations, take practice quizzes and tests to master any topic.

I love the way expert tutors clearly explains the answers to my homework questions. Keep up the good work!

– Maritess, College Student30 millionstudents.

I learned more in10 minutesthan 1 month of chemistry classes

I learned more in10 minutesthan 1 month of chemistry classes

I aced the CLEP exam and earned3 college credits!

Over65 million usershave prepared fordisplayNameByProductKey[registrationData.product testPrepCocoon] and otherexams on

The videos have changed the way I teach! The videos on Study.com accomplish in5 minuteswhat would take me an entire class.

It provides a quick and engaging way to cover material needed to understand readings we are covering in class.

It provides a quick and engaging way to cover material needed to understand readings we are covering in class.

A teacher friend recommended Study.com for social studies. I enjoy assigning the videos to my students. The videos are short, to the point, and the quiz allows me to test their knowledge on whatever subject in social studies I am teaching at the time.

Every time I have searched for a lesson, there has been a perfect match to my needs as a middle school teacher of science, and algebra.

Your lessons are very well developed, especially the videos that use analogies for scientific phenomena. Great way to memorize science concepts.

I love the way the lessons are laid out in small chunks with quizzes to make sure you understand a concept before moving on. Excellent!

I am a 7th-grade teacher and often use it for language arts and world history. The students find it quite engaging. On a professional note, it has helped me pass 2 out of the for 4 Single Subject CSET English Exams! Now I am using it to help me pass the last 2 subtest exams.

As a math/science tutor I find these lessons extremely helpful when introducing concepts to my students or reinforcing what they have been taught.

I like that students can retake quizzes until they achieve a perfect score. I also like the ability to create guided note templates from the transcripts of each video lesson.

Over65 million usershave prepared fordisplayNameByProductKey[registrationData.product testPrepCocoon] and otherexams on

Over65 million usershave prepared fordisplayNameByProductKey[registrationData.product testPrepCocoon] and otherexams on