How Loww Can It Go

1. Basically, the value of any securities is worth the present value of all future cash flow the owner which will receive.

For stockholders, future cash flow that they will receive is in the form of dividend and the yield from selling of stocks. Therefore, if stockholders intend to hold stocks infinitely, we can value common stock by sum up present value of future dividend of company. This method is known as Dividend Discounted Model (DDM).

In its simplest form, the DDM uses, mathematically it can be expressed as:

Where Dt is the expected dividend in period t and k is the required rate of return for the investor.

Assumptions on this DDM are:

• Dividends are expected to be distributed at the end of each year until infinity.

• Dividends are the only way investors get money back from the company. This implies that any share buyback would be ignored.

• The implication of the second assumption is that the investor is expected to hold the share for an infinite period: he will not sell it, at any moment.

DDM - Pharmacopia Company Stocks:

By DDM we can see that the value of