Risk and the Valuation of Common Stock

descriptionPublicationkeyboard_double_arrow_right Article 01 May 1969 English Publisher:University of Chicago PressJournal:Journal of Political Economy, volume 77, pages 349-362 (issn: 0022-3808, eissn: 1537-534X,

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Authors: Bower, Richard S; Bower, Dorothy H;

doi: 10.1086/259520

Risk and the Valuation of Common Stock

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Abstract

It is quite reasonable, and quite acceptable among both academic researchers (Gordon and Shapiro, 1956; Walter, 1956; Modigliani and Miller, 1961; Malkiel, 1963) and professional security analysts (Molodovsky, 1959, 1960, 1965; Bauman, 1965; Wendt, 1965), to view the price of a share of stock as the present value of future dividends expected from the share discounted at a rate which reflects the risk borne by an owner of the share. If the period between dividends is constant, earnings growth is expected to return to normal after some periods at a non-normal rate and dividend payout rate is expected to be the same in evey period; then the price on the date of a dividend payment is described by :1

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