"use strict"; const {Fragment: _Fragment, jsx: _jsx, jsxs: _jsxs} = arguments[0]; const {useMDXComponents: _provideComponents} = arguments[0]; function _createMdxContent(props) { const _components = { annotation: "annotation", blockquote: "blockquote", br: "br", em: "em", h2: "h2", h3: "h3", li: "li", math: "math", mfrac: "mfrac", mi: "mi", mn: "mn", mo: "mo", mover: "mover", mrow: "mrow", mspace: "mspace", msub: "msub", msubsup: "msubsup", msup: "msup", mtext: "mtext", ol: "ol", p: "p", semantics: "semantics", span: "span", strong: "strong", ul: "ul", ..._provideComponents(), ...props.components }; return _jsxs(_Fragment, { children: [_jsx(_components.h2, { children: _jsx(_components.strong, { children: "Learning Outcomes" }) }), "\n", _jsx(_components.p, { children: "This article explains how to value equities using dividend-based present value methods and market-based multiples, and how dividends feed into basic derivative pricing relationships. After reading, you will be able to:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Apply the dividend discount model (DDM), including the Gordon growth model and a simple multistage structure." }), "\n", _jsx(_components.li, { children: "Interpret and use relative valuation multiples (e.g., P/E and P/B), including key adjustments and limitations." }), "\n", _jsx(_components.li, { children: "Explain how dividends affect forward prices and option valuation inputs used in no-arbitrage pricing and risk measurement." }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "GARP FRM Part 1 Syllabus" }) }), "\n", _jsx(_components.p, { children: "For the GARP FRM Part 1 exam, you are expected to understand equity valuation basics with a focus on the following syllabus points:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Present value logic, discounting, and the law of one price as the basic framework for valuation and no-arbitrage pricing." }), "\n", _jsx(_components.li, { children: "How dividends (cash dividends and dividend yields) enter forward/option pricing relationships under risk-neutral valuation." }), "\n", _jsx(_components.li, { children: "How market prices and multiples are used for relative valuation, and what their main limitations imply for model risk." }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Test Your Knowledge" }) }), "\n", _jsx(_components.p, { children: _jsx(_components.em, { children: "Attempt these questions before reading this article. 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mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "mclose", children: ")" })] })] })] })] }), "\n"] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: "A stock paid a dividend of $2.00 just now, dividends are expected to grow at 4% indefinitely, and the cost of equity is 9%. What is the estimated price per share?" }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: "Name two reasons why a peer-group P/E multiple might be a poor input for valuing a target company." }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsxs(_components.p, { children: ["True/False (brief explanation required): A higher continuous dividend yield ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] }) })] }), " increases the no-arbitrage forward price ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "F" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "F_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "F" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " of an equity index."] }), "\n"] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "What Do You Know Already?" }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["Can you move comfortably between ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " (just paid) and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_1" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " (next expected) when using the Gordon growth model?"] }), "\n", _jsx(_components.li, { children: "When you see a P/E multiple, do you immediately ask “trailing or forward, and how are earnings defined”?" }), "\n", _jsx(_components.li, { children: "Can you write the equity forward price with a dividend yield, and explain why dividends reduce expected capital gains in a risk-neutral setting?" }), "\n"] }), "\n", _jsx(_components.p, { children: "Use these prompts to gauge your starting point; then focus your revision where your answers were least confident." }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Introduction" }) }), "\n", _jsx(_components.p, { children: "Equity valuation is often treated as a “front-office” topic, but it sits directly inside risk management work. Banks and buy-side firms need equity values for collateral assessment, margining, stress testing, capital planning, concentration limits, and P&L explain. A mis-specified equity valuation model is also a form of model risk: it can distort risk metrics such as VaR and expected shortfall by embedding the wrong sensitivities to growth, discount rates, and payouts." }), "\n", _jsx(_components.p, { children: "For FRM Part 1, the most important unifying idea is that valuation is a present value exercise. In fixed income, promised cash flows are discounted using discount factors and term structures; in derivatives, no-arbitrage arguments and risk-neutral valuation connect today’s price to discounted expected payoffs at the risk-free rate. For equities, dividends are uncertain and discretionary, so the discount rate includes a risk premium (a cost of equity). Even so, the “discount expected cash flows” logic remains the anchor." }), "\n", _jsx(_components.p, { children: "Dividends also matter for derivatives. Under no-arbitrage pricing, a stock or index that pays dividends has a lower forward price than an otherwise identical non-dividend-paying asset. In binomial trees, dividend yield enters the risk-neutral drift (and therefore the risk-neutral probabilities), and in option pricing it changes call/put values and early exercise incentives for American options." }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Dividend Discount Model (DDM)" }), _jsx(_components.br, {}), "\n", "A valuation approach that sets the equity price equal to the present value of expected future dividends (and, in practice, a terminal value representing dividends beyond an explicit forecast horizon)."] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Equity valuation as discounted cash flows" }) }), "\n", _jsx(_components.p, { children: "At a high level, the value of any asset is the present value of its expected future cash flows discounted at rates that reflect timing and risk. In fixed income, this appears as discounting coupons and principal using discount factors. The same “three-step” logic applies broadly:" }), "\n", _jsxs(_components.ol, { children: ["\n", _jsx(_components.li, { children: "Forecast cash flows." }), "\n", _jsx(_components.li, { children: "Choose appropriate discount rates." }), "\n", _jsx(_components.li, { children: "Compute present value by discounting and summing." }), "\n"] }), "\n", _jsxs(_components.p, { children: ["In a no-arbitrage setting for risk-free cash flows, discount factors are often written as a function of maturity. With continuous compounding, a discount factor over horizon ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "t" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6151em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "t" })] }) })] }), " can be written as:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "d" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "r" }), _jsx(_components.mi, { children: "t" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "d(t) = e^{-rt}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "d" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord mathnormal", children: "t" }), _jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7936em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.7936em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" })] }) })] }) }) }) }) })] })] })] })] }), "\nwhere ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "r" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "r" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.4306em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "r" })] }) })] }), " is the continuously compounded risk-free rate for maturity ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "t" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6151em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "t" })] }) })] }), "."] }), "\n", _jsxs(_components.p, { children: ["Equity cash flows are not risk-free. The simplest equity cash flow is the dividend, but dividends are uncertain and management can change payout policy (including shifting between dividends and share repurchases). Therefore, in DDM-style valuation, we typically discount expected dividends at a required return on equity, ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "k" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "k" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] }) })] }), "."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsxs(_components.strong, { children: ["Key Term: Cost of equity ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "k" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "k" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] }) })] })] }), _jsx(_components.br, {}), "\n", "The required rate of return demanded by equity holders, reflecting the time value of money and compensation for equity risk (systematic and, depending on context, other priced risks)."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["A generic single-share dividend present value model is:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msubsup, { children: [_jsx(_components.mo, { children: "∑" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mi, { mathvariant: "normal", children: "∞" })] }), _jsxs(_components.mfrac, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "E" }), _jsx(_components.mo, { stretchy: "false", children: "[" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: "]" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "k" }), _jsxs(_components.msup, { children: [_jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mi, { children: "t" })] })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_0 = \\sum_{t=1}^{\\infty}\\frac{E[D_t]}{(1+k)^t}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.53em", verticalAlign: "-0.52em" } }), _jsxs(_components.span, { className: "mop", children: [_jsx(_components.span, { className: "mop op-symbol small-op", style: { position: "relative", top: "0em" }, children: "∑" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8043em" }, children: [_jsxs(_components.span, { style: { top: "-2.4003em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mrel mtight", children: "=" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }), _jsxs(_components.span, { style: { top: "-3.2029em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsx(_components.span, { className: "mord mtight", children: "∞" }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2997em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.01em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mopen mtight", children: "(" }), _jsx(_components.span, { className: "mord mtight", children: "1" }), _jsx(_components.span, { className: "mbin mtight", children: "+" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03148em" }, children: "k" }), _jsxs(_components.span, { className: "mclose mtight", children: [_jsx(_components.span, { className: "mclose mtight", children: ")" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.7253em" }, children: _jsxs(_components.span, { style: { top: "-2.786em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }) }) }) })] })] }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.485em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "mopen mtight", children: "[" }), _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2963em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.0278em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mclose mtight", children: "]" })] }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.52em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] }), "\nwhere:"] }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: [_jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " = current share price (as implied by the valuation model)"] }), "\n", _jsxs(_components.li, { children: [_jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "E" }), _jsx(_components.mo, { stretchy: "false", children: "[" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: "]" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "E[D_t]" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "mopen", children: "[" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mclose", children: "]" })] }) })] }), " = expected dividend at time ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "t" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "t" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6151em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "t" })] }) })] })] }), "\n", _jsxs(_components.li, { children: [_jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "k" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "k" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] }) })] }), " = cost of equity"] }), "\n"] }), "\n", _jsx(_components.p, { children: "This is an “absolute valuation” model: it tries to estimate value from cash flows and discount rates rather than from peer prices." }), "\n", _jsx(_components.h3, { children: "Dividend yield and expected return link" }), "\n", _jsxs(_components.p, { children: ["A useful rearrangement appears when dividends grow at a stable rate. In that case, the required return can be decomposed into dividend yield plus growth:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "k" }), _jsx(_components.mo, { children: "≈" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] })] }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "g" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "k \\approx \\frac{D_1}{P_0} + g" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "≈" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.3335em", verticalAlign: "-0.4451em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8884em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3173em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.1389em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.4101em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3173em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.0278em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.4451em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" })] })] })] }), "\nThis identity is not a general truth for all equities; it is a feature of the constant-growth DDM. It is still widely used in practice as a simple way to interpret what the market price implies about required return or growth."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Dividend yield" }), _jsx(_components.br, {}), "\n", "The ratio of next expected dividend to current price, ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\frac{D_1}{P_0}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.3335em", verticalAlign: "-0.4451em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8884em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3173em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.1389em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.4101em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3173em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.0278em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.4451em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] }) })] }), ", often interpreted as the “cash yield” component of equity return under stable payout assumptions."] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Dividend discount models for equities" }) }), "\n", _jsx(_components.p, { children: "The DDM becomes operational only after you impose a structure on expected dividends. The FRM exam typically tests the constant-growth (Gordon) case and simple multistage setups, plus conceptual links between dividends and derivative pricing." }), "\n", _jsx(_components.h3, { children: "Gordon growth model" }), "\n", _jsxs(_components.p, { children: ["Assume dividends grow forever at a constant rate ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "g" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" })] }) })] }), " with ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "g" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mi, { children: "k" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g < k" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7335em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "<" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] })] })] }), ". Then:"] }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "g" }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_1 = D_0(1+g)" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord 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className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "mclose", children: ")" })] })] })] }) }), "\n", _jsx(_components.li, { children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "g" }), _jsxs(_components.msup, { children: [_jsx(_components.mo, { stretchy: "false", children: ")" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "1" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_t = D_1(1+g)^{t-1}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2806em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.0641em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsxs(_components.span, { className: "mclose", children: [_jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8141em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }) }) }) })] })] })] })] }) }), "\n"] }), "\n", _jsxs(_components.p, { children: ["Substituting into the infinite series yields the Gordon growth formula:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "k" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "g" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_0 = \\frac{D_1}{k-g}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.3695em", verticalAlign: "-0.4811em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8884em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03148em" }, children: "k" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03588em" }, children: "g" })] }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.4101em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3173em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.0278em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.4811em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] })] }), "\n", _jsx(_components.p, { children: "Key conditions and interpretations:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["The model requires ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "g" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mi, { children: "k" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g < k" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7335em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "<" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] })] })] }), "; otherwise the series does not converge and the model breaks."] }), "\n", _jsxs(_components.li, { children: ["Higher ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "g" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" })] }) })] }), " raises value, higher ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "k" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "k" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] }) })] }), " lowers value."] }), "\n", _jsx(_components.li, { children: "The model is most defensible for mature firms with stable payout policy and stable long-run growth." }), "\n"] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Gordon growth model" }), _jsx(_components.br, {}), "\n", "A constant-growth DDM where ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "k" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "g" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_0 = \\frac{D_1}{k-g}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.3695em", verticalAlign: "-0.4811em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8884em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03148em" }, children: "k" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03588em" }, children: "g" })] }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.4101em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3173em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.0278em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.4811em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] }), ", used when dividends are expected to grow indefinitely at stable rate ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "g" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" })] }) })] }), " below the cost of equity ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "k" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "k" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] }) })] }), "."] }), "\n"] }), "\n", _jsx(_components.h3, { children: "Worked Example 1.1" }), "\n", _jsx(_components.p, { children: "A company has just paid a dividend of $2.00 per share. Dividends are expected to grow at 4% per year indefinitely. The cost of equity is 9%. Estimate the theoretical price per share and the implied dividend yield." }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Answer:" }), _jsx(_components.br, {}), "\n", "Step 1: Compute next expected dividend."] }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "g" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "2.00" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1.04" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "2.08" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_1 = D_0(1+g) = 2.00(1.04) = 2.08" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord", children: "2.00" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1.04" }), _jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "2.08" })] })] })] }) }), "\n", _jsx(_components.p, { children: "Step 2: Apply Gordon growth model." }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "k" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "g" })] })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsx(_components.mn, { children: "2.08" }), _jsxs(_components.mrow, { children: [_jsx(_components.mn, { children: "0.09" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "0.04" })] })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsx(_components.mn, { children: "2.08" }), _jsx(_components.mn, { children: "0.05" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "41.60" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_0 = \\frac{D_1}{k-g} = \\frac{2.08}{0.09-0.04} = \\frac{2.08}{0.05} = 41.60" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "2.2408em", verticalAlign: "-0.8804em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.3603em" }, children: [_jsxs(_components.span, { style: { top: "-2.314em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" })] })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.677em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8804em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "2.0908em", verticalAlign: "-0.7693em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.3214em" }, children: [_jsxs(_components.span, { style: { top: "-2.314em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord", children: "0.09" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mord", children: "0.04" })] })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.677em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsx(_components.span, { className: "mord", children: "2.08" }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.7693em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "2.0074em", verticalAlign: "-0.686em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.3214em" }, children: [_jsxs(_components.span, { style: { top: "-2.314em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsx(_components.span, { className: "mord", children: "0.05" }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.677em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsx(_components.span, { className: "mord", children: "2.08" }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.686em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "41.60" })] })] })] }) }), "\n", _jsx(_components.p, { children: "Step 3: Compute implied dividend yield." }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsx(_components.mn, { children: "2.08" }), _jsx(_components.mn, { children: "41.60" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "0.05" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "5" }), _jsx(_components.mi, { mathvariant: "normal", children: "%" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\frac{D_1}{P_0} = \\frac{2.08}{41.60} = 0.05 = 5\\%" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "2.1963em", verticalAlign: "-0.836em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.3603em" }, children: [_jsxs(_components.span, { style: { top: "-2.314em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: 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top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.836em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "2.0074em", verticalAlign: "-0.686em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.3214em" }, children: [_jsxs(_components.span, { style: { top: "-2.314em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsx(_components.span, { className: "mord", children: "41.60" }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.677em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsx(_components.span, { className: "mord", children: "2.08" }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.686em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "0.05" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8056em", verticalAlign: "-0.0556em" } }), _jsx(_components.span, { className: "mord", children: "5%" })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["Step 4: Check the return decomposition.", _jsx(_components.br, {}), "\n", "Dividend yield 5% plus growth 4% equals 9%, matching the cost of equity."] }), "\n"] }), "\n", _jsx(_components.h3, { children: "Multistage dividend models and terminal value" }), "\n", _jsx(_components.p, { children: "Many firms do not have stable dividend growth. A common approach is:" }), "\n", _jsxs(_components.ol, { children: ["\n", _jsxs(_components.li, { children: ["Forecast dividends explicitly for ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "N" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "N" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "N" })] }) })] }), " years (possibly with high growth)."] }), "\n", _jsxs(_components.li, { children: ["Assume stable growth ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "g" }), _jsx(_components.mi, { mathvariant: "normal", children: "∞" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g_{\\infty}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.1514em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsx(_components.span, { className: "mord mtight", children: "∞" }) }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " after year ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "N" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "N" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "N" })] }) })] }), "."] }), "\n", _jsxs(_components.li, { children: ["Use a terminal value at time ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "N" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "N" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "N" })] }) })] }), " to represent the value of all dividends after ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "N" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "N" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "N" })] }) })] }), "."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["If the stable-growth assumption begins after year ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "N" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "N" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "N" })] }) })] }), ", then the terminal value at time ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "N" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "N" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "N" })] }) })] }), " is:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mi, { children: "N" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "N" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mn, { children: "1" })] })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "k" }), _jsx(_components.mo, { children: "−" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "g" }), _jsx(_components.mi, { mathvariant: "normal", children: "∞" })] })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_N = \\frac{D_{N+1}}{k-g_{\\infty}}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3283em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.10903em" }, children: "N" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.4114em", verticalAlign: "-0.4811em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.9303em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03148em" }, children: "k" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.1645em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.0359em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsx(_components.span, { className: "mord mtight", children: "∞" }) }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.452em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3448em" }, children: _jsxs(_components.span, { style: { top: "-2.3567em", marginLeft: "-0.0278em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.10903em" }, children: "N" }), _jsx(_components.span, { className: "mbin mtight", children: "+" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2028em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.4811em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] }), "\nand the current price is:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msubsup, { children: [_jsx(_components.mo, { children: "∑" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mi, { children: "N" })] }), _jsxs(_components.mfrac, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "E" }), _jsx(_components.mo, { stretchy: "false", children: "[" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mi, { children: "t" })] }), _jsx(_components.mo, { stretchy: "false", children: "]" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "k" }), _jsxs(_components.msup, { children: [_jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mi, { children: "t" })] })] })] }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mi, { children: "N" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mi, { children: "k" }), _jsxs(_components.msup, { children: [_jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mi, { children: "N" })] })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_0 = \\sum_{t=1}^{N}\\frac{E[D_t]}{(1+k)^t} + \\frac{P_N}{(1+k)^N}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.53em", verticalAlign: "-0.52em" } }), _jsxs(_components.span, { className: "mop", children: [_jsx(_components.span, { className: "mop op-symbol small-op", style: { position: "relative", top: "0em" }, children: "∑" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.9812em" }, children: [_jsxs(_components.span, { style: { top: "-2.4003em", marginLeft: "0em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mrel mtight", children: "=" }), _jsx(_components.span, { className: "mord mtight", children: "1" })] }) })] }), _jsxs(_components.span, { style: { top: "-3.2029em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.10903em" }, children: "N" }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.2997em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.01em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mopen mtight", children: "(" }), _jsx(_components.span, { className: "mord mtight", children: "1" }), _jsx(_components.span, { className: "mbin mtight", children: "+" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03148em" }, children: "k" }), _jsxs(_components.span, { className: "mclose mtight", children: [_jsx(_components.span, { className: "mclose mtight", children: ")" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.7253em" }, children: _jsxs(_components.span, { style: { top: "-2.786em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }) }) }) })] })] }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.485em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "mopen mtight", children: "[" }), _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.2963em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.0278em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mclose mtight", children: "]" })] }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.52em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.4155em", verticalAlign: "-0.5269em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8886em" }, children: [_jsxs(_components.span, { style: { top: "-2.6481em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mopen mtight", children: "(" }), _jsx(_components.span, { className: "mord mtight", children: "1" }), _jsx(_components.span, { className: "mbin mtight", children: "+" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03148em" }, children: "k" }), _jsxs(_components.span, { className: "mclose mtight", children: [_jsx(_components.span, { className: "mclose mtight", children: ")" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.7741em" }, children: _jsxs(_components.span, { style: { top: "-2.786em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.10903em" }, children: "N" }) })] }) }) }) }) })] })] }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.4103em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3448em" }, children: _jsxs(_components.span, { style: { top: "-2.3567em", marginLeft: "-0.1389em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.10903em" }, children: "N" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.1433em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.5269em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] })] }), "\n", _jsx(_components.p, { children: "Terminal value often accounts for most of the valuation. That makes DDM outputs highly sensitive to:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: [_jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "k" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "k" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] }) })] }), " (often tied to market risk premia and interest rates),"] }), "\n", _jsxs(_components.li, { children: ["long-run growth ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "g" }), _jsx(_components.mi, { mathvariant: "normal", children: "∞" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g_{\\infty}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.1514em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsx(_components.span, { className: "mord mtight", children: "∞" }) }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), ","] }), "\n", _jsx(_components.li, { children: "the transition from high growth to stable growth," }), "\n", _jsx(_components.li, { children: "payout policy (dividends versus repurchases)." }), "\n"] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Key Term: Terminal value" }), _jsx(_components.br, {}), "\n", "A present value at the end of an explicit forecast horizon representing the value of cash flows beyond that horizon, commonly computed using a stable-growth perpetuity formula."] }), "\n"] }), "\n", _jsx(_components.h3, { children: "Worked Example 2.1" }), "\n", _jsxs(_components.p, { children: ["A company just paid a dividend of $1.50. Dividends are expected to grow at 10% for the next 3 years, then at 4% indefinitely. The cost of equity is 8.5%. Estimate ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " using a two-stage DDM."] }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Answer:" }), _jsx(_components.br, {}), "\n", "Step 1: Forecast dividends for years 1 to 4."] }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.50" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1.10" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.65" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_1 = 1.50(1.10) = 1.65" })] }) }) }), 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mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord", children: "1.50" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1.10" }), _jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1.65" })] })] })] }) }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "2" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.65" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1.10" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.815" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_2 = 1.65(1.10) = 1.815" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "2" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord", children: "1.65" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1.10" }), _jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1.815" })] })] })] }) }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "3" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.815" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1.10" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.9965" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_3 = 1.815(1.10) = 1.9965" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "3" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord", children: "1.815" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1.10" }), _jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "1.9965" })] })] })] }) }), "\n", _jsx(_components.p, { children: "After year 3, growth becomes 4%, so:" }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "4" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "3" })] }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1.04" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1.9965" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1.04" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "2.07636" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_4 = D_3(1.04) = 1.9965(1.04) = 2.07636" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t 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})] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "3" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1.04" }), _jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord", children: "1.9965" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1.04" }), _jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "2.07636" })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["Step 2: Compute terminal value at ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "3" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "t=3" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6151em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "t" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "3" })] })] })] }), " (value at the end of year 3)."] }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "3" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "4" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "k" }), _jsx(_components.mo, { children: "−" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "g" }), _jsx(_components.mi, { mathvariant: "normal", children: "∞" })] })] })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsx(_components.mn, { children: "2.07636" }), _jsxs(_components.mrow, { children: [_jsx(_components.mn, { children: "0.085" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mn, { children: "0.04" })] })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsx(_components.mn, { children: "2.07636" }), _jsx(_components.mn, { children: "0.045" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "46.1413" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_3 = \\frac{D_4}{k-g_{\\infty}} = \\frac{2.07636}{0.085-0.04} = \\frac{2.07636}{0.045} = 46.1413" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" 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className: "mord mtight", children: "∞" }) }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.677em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "4" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8804em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "2.0908em", verticalAlign: "-0.7693em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "1.3214em" }, children: [_jsxs(_components.span, { style: { top: "-2.314em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord", children: "0.085" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mord", children: "0.04" })] })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.677em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord", children: _jsx(_components.span, { className: "mord", children: "2.07636" }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.7693em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "2.0074em", verticalAlign: "-0.686em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: 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children: _jsx(_components.span, { className: "vlist", style: { height: "0.686em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "46.1413" })] })] })] }) }), "\n", _jsxs(_components.p, { children: ["Step 3: Discount dividends in years 1–3 and the terminal value back to today.", _jsx(_components.br, {}), "\n", "Discount factor per year is ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: 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(1.085)^{-t}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.0436em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" }), _jsxs(_components.span, { className: "mclose", children: [_jsx(_components.span, { className: 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})] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.0436em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1.085" }), _jsxs(_components.span, { className: "mclose", children: [_jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.7936em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" })] }) })] }) }) }) }) })] })] })] })] }), "."] }), "\n", _jsxs(_components.p, { children: ["Present value of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_1" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: 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_jsxs(_components.span, { style: { top: "-3.113em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "3" }) })] }) }) }) }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "36.1127" })] })] })] }) }), "\n", _jsx(_components.p, { children: "Step 4: Sum present values." }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "≈" }), _jsx(_components.mn, { children: "1.5207" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mn, { children: "1.5423" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mn, { children: "1.5630" }), _jsx(_components.mo, { children: "+" }), _jsx(_components.mn, { children: "36.1127" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "40.7387" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "P_0 \\approx 1.5207 + 1.5423 + 1.5630 + 36.1127 = 40.7387" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "≈" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "1.5207" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "1.5423" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "1.5630" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "36.1127" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "40.7387" })] })] })] }) }), "\n", _jsx(_components.p, { children: "The estimated value is about $40.74 per share." }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Relative valuation using market multiples" }) }), "\n", _jsx(_components.p, { children: "Absolute valuation asks, “What should this stock be worth given cash flows and risk?” Relative valuation asks, “What are similar companies priced at, and what does that imply for this company?”" }), "\n", _jsx(_components.p, { children: "Relative valuation is common in practice because it is fast, uses readily available data, and reflects current market pricing. 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P/E uses next-year forecast earnings ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "E" }), _jsx(_components.mn, { children: "1" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "E_1" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "msupsub", children: 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}), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: _jsx(_components.strong, { children: "P/B (price-to-book)" }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Often used for banks and insurers where book value is closer to an economic balance sheet." }), "\n", _jsx(_components.li, { children: "Highly affected by accounting rules for fair value changes and loan loss provisions." }), "\n"] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: _jsx(_components.strong, { children: "EV/EBITDA" }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Uses enterprise value (EV = market value of equity + net debt + other claims, with adjustments)." }), "\n", _jsx(_components.li, { children: "EBITDA is less sensitive to depreciation methods, but still not cash flow and can omit required reinvestment." }), "\n"] }), "\n"] }), "\n", _jsxs(_components.li, { children: ["\n", _jsx(_components.p, { children: _jsx(_components.strong, { children: "P/S (price-to-sales)" }) }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Useful when earnings are temporarily depressed or negative, but ignores margins and capital intensity." }), "\n"] }), "\n"] }), "\n"] }), "\n", _jsx(_components.h3, { children: "Linking DDM to P/E intuition (why multiples move)" }), "\n", _jsxs(_components.p, { children: ["Under Gordon growth, if next earnings are ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "E" }), _jsx(_components.mn, { children: "1" })] }) }), _jsx(_components.annotation, { encoding: 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[_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: 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className: "mord mathnormal mtight", style: { marginRight: "0.03588em" }, children: "g" })] }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.4101em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "b" }), _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3173em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.0576em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.4811em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "1em" } }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "⇒" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "1em" } }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.3335em", verticalAlign: "-0.4451em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8884em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.05764em" }, children: "E" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3173em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.0576em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.4101em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3173em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.1389em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.4451em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.3612em", verticalAlign: "-0.4811em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8801em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03148em" }, children: "k" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03588em" }, children: "g" })] }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.394em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "b" }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.4811em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] })] })] })] })] }), "\n", _jsx(_components.p, { children: "This simple relationship helps interpret multiple changes:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["Higher payout ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "b" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "b" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", children: "b" })] }) })] }), " raises P/E (all else equal)."] }), "\n", _jsxs(_components.li, { children: ["Higher expected growth ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "g" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" })] }) })] }), " raises P/E."] }), "\n", _jsxs(_components.li, { children: ["Higher required return ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "k" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "k" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] }) })] }), " (for example, from higher risk premia or higher rates) lowers P/E."] }), "\n"] }), "\n", _jsx(_components.p, { children: "Relative valuation often works best when the peer set has similar:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "growth outlook," }), "\n", _jsx(_components.li, { children: "business risk," }), "\n", _jsx(_components.li, { children: "accounting policies," }), "\n", _jsx(_components.li, { children: "payout and reinvestment needs," }), "\n", _jsx(_components.li, { children: "capital structure (or when using EV-based multiples that adjust for it)." }), "\n"] }), "\n", _jsx(_components.h3, { children: "Worked Example 3.1" }), "\n", _jsx(_components.p, { children: "A peer group trades at a median forward P/E of 16.0x. A target company is expected to earn $3.20 per share next year. Estimate an implied equity value per share using a simple comparable multiple approach." }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsxs(_components.p, { children: [_jsx(_components.strong, { children: "Answer:" }), _jsx(_components.br, {}), "\n", "Step 1: Identify the peer multiple and the target metric.", _jsx(_components.br, {}), "\n", "Forward P/E = 16.0", _jsx(_components.br, {}), "\n", "Target forward EPS = 3.20"] }), "\n", _jsx(_components.p, { children: "Step 2: Apply the multiple." }), "\n", _jsx(_components.span, { className: "katex-display", children: _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", display: "block", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsxs(_components.mover, { accent: "true", children: [_jsx(_components.mi, { children: "P" }), _jsx(_components.mo, { children: "^" })] }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "16.0" }), _jsx(_components.mo, { children: "×" }), _jsx(_components.mn, { children: "3.20" }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "51.20" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\hat{P}_0 = 16.0 \\times 3.20 = 51.20" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.0968em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord accent", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsxs(_components.span, { className: "vlist", style: { height: "0.9468em" }, children: [_jsxs(_components.span, { style: { top: "-3em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" })] }), _jsxs(_components.span, { style: { top: "-3.2523em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "accent-body", style: { left: "-0.1667em" }, children: _jsx(_components.span, { className: "mord", children: "^" }) })] })] }) }) }) }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "16.0" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "×" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "3.20" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6444em" } }), _jsx(_components.span, { className: "mord", children: "51.20" })] })] })] }) }), "\n", _jsx(_components.p, { children: "The implied value is $51.20 per share." }), "\n"] }), "\n", _jsx(_components.p, { children: "This method is intentionally simple. In practice, you would typically check:" }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "whether EPS is adjusted for one-off items," }), "\n", _jsx(_components.li, { children: "whether peers have similar accounting and cyclicality," }), "\n", _jsx(_components.li, { children: "whether the target deserves a premium/discount due to growth, profitability, or risk." }), "\n"] }), "\n", _jsx(_components.h3, { children: _jsx(_components.strong, { children: "Exam Warning" }) }), "\n", _jsxs(_components.blockquote, { children: ["\n", _jsx(_components.p, { children: "Common exam errors include:" }), "\n", _jsxs(_components.ol, { children: ["\n", _jsxs(_components.li, { children: ["Using ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "0" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_0" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " instead of ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mn, { children: "1" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_1" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " in the Gordon growth formula (the model uses next expected dividend)."] }), "\n", _jsxs(_components.li, { children: ["Forgetting the convergence condition ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "g" }), _jsx(_components.mo, { children: "<" }), _jsx(_components.mi, { children: "k" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g < k" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7335em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "<" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] })] })] }), " (if ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "g" }), _jsx(_components.mo, { children: "≥" }), _jsx(_components.mi, { children: "k" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g \\ge k" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8304em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "≥" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03148em" }, children: "k" })] })] })] }), ", the constant-growth DDM is not valid)."] }), "\n", _jsxs(_components.li, { children: ["Mixing a dividend growth rate ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "g" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "g" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "g" })] }) })] }), " (DDM input) with a dividend yield ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] }) })] }), " (derivative pricing input). They are different objects."] }), "\n", _jsx(_components.li, { children: "Treating a reported P/E as comparable without asking “trailing vs forward” and whether earnings are normalized." }), "\n", _jsx(_components.li, { children: "Omitting dividends when writing the no-arbitrage equity forward price; dividend-paying assets have lower forward prices than non-dividend-paying assets, all else equal." }), "\n"] }), "\n"] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Dividends in derivative pricing and basic risk measurement" }) }), "\n", _jsx(_components.p, { children: "Even though DDM and multiples are equity valuation tools, dividends also enter derivative valuation directly via no-arbitrage logic. This is tested across FRM Part 1 derivative readings because it connects discounting, replication, and risk-neutral valuation." }), "\n", _jsx(_components.h3, { children: "No-arbitrage forward price with dividends" }), "\n", _jsxs(_components.p, { children: ["For an asset with a continuous dividend yield ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] }) })] }), ", the standard no-arbitrage forward price is:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "F" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "S" }), _jsx(_components.mn, { children: "0" })] }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mi, { children: "r" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "q" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mi, { children: "T" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "F_0 = S_0 e^{(r-q)T}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "F" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.038em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "S" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0576em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.888em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mopen mtight", children: "(" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03588em" }, children: "q" }), _jsx(_components.span, { className: "mclose mtight", children: ")" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.13889em" }, children: "T" })] }) })] }) }) }) }) })] })] })] })] }), "\nInterpretation under risk-neutral valuation:"] }), "\n", _jsxs(_components.ul, { children: ["\n", _jsxs(_components.li, { children: ["Total expected return equals the risk-free rate ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "r" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "r" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.4306em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "r" })] }) })] }), "."] }), "\n", _jsxs(_components.li, { children: ["If the asset pays dividends at rate ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] }) })] }), ", then expected capital gains must be lower by approximately ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "q" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "q" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] }) })] }), " to keep total return at ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "r" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "r" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.4306em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "r" })] }) })] }), "."] }), "\n"] }), "\n", _jsxs(_components.p, { children: ["If dividends are known discrete cash amounts (not a continuous yield), a common representation is:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "F" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "S" }), _jsx(_components.mn, { children: "0" })] }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "P" }), _jsx(_components.mi, { children: "V" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mtext, { children: "dividends during " }), _jsx(_components.mo, { stretchy: "false", children: "[" }), _jsx(_components.mn, { children: "0" }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mi, { children: "T" }), _jsx(_components.mo, { stretchy: "false", children: "]" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "r" }), _jsx(_components.mi, { children: "T" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "F_0 = (S_0 - PV(\\text{dividends during }[0,T]))e^{rT}" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "F" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "S" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3011em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0576em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "0" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.0913em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.22222em" }, children: "V" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord text", children: _jsx(_components.span, { className: "mord", children: "dividends during " }) }), _jsx(_components.span, { className: "mopen", children: "[" }), _jsx(_components.span, { className: "mord", children: "0" }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "T" }), _jsx(_components.span, { className: "mclose", children: "]))" }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8413em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.13889em" }, children: "T" })] }) })] }) }) }) }) })] })] })] })] }), "\nThis mirrors the idea that prepaid cash flows reduce the “effective” spot price used for carry."] }), "\n", _jsx(_components.h3, { children: "Dividends in binomial trees and risk-neutral probabilities" }), "\n", _jsxs(_components.p, { children: ["In a binomial model, dividend yield changes the risk-neutral drift. A common adjustment is to replace ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "r" }), _jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "t" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e^{r\\Delta t}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8413em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8413em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "mord mtight", children: "Δ" }), _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" })] }) })] }) }) }) }) })] })] }) })] }), " with ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mi, { children: "r" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "q" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "t" })] })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "e^{(r-q)\\Delta t}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.888em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.888em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mopen mtight", children: "(" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.03588em" }, children: "q" }), _jsx(_components.span, { className: "mclose mtight", children: ")" }), _jsx(_components.span, { className: "mord mtight", children: "Δ" }), _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" })] }) })] }) }) }) }) })] })] }) })] }), " inside the risk-neutral probability:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "π" }), _jsx(_components.mi, { children: "u" })] }), _jsx(_components.mo, { children: "=" }), _jsxs(_components.mfrac, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mi, { children: "r" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "q" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "t" })] })] }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "D" })] }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "U" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "D" })] })] }), _jsx(_components.mo, { separator: "true", children: "," }), _jsx(_components.mspace, { width: "1em" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "π" }), _jsx(_components.mi, { children: "d" })] }), _jsx(_components.mo, { children: "=" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "−" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "π" }), _jsx(_components.mi, { children: "u" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\pi_u = \\frac{e^{(r-q)\\Delta t}-D}{U-D}, \\quad \\pi_d = 1-\\pi_u" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "π" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.1514em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", 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}, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.394em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.9667em" }, children: _jsxs(_components.span, { style: { top: "-2.9667em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: 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})] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.4033em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mpunct", children: "," }), _jsx(_components.span, { className: "mspace", style: { marginRight: "1em" } }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.1667em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "π" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3361em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "d" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "=" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7278em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.5806em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "π" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.1514em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0359em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "u" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] })] })] }), "\nwhere ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "U" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "U" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.10903em" }, children: "U" })] }) })] }), " and ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "D" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" })] }) })] }), " are the up and down factors (often functions of volatility and step size). This is a direct application of risk-neutral valuation: expected growth in the asset price (net of dividend yield) is ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "r" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "q" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "r-q" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6667em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.625em", verticalAlign: "-0.1944em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03588em" }, children: "q" })] })] })] }), "."] }), "\n", _jsx(_components.h3, { children: "Dividends and American option early exercise" }), "\n", _jsxs(_components.p, { children: ["Dividends create an incentive to own the stock before the ex-dividend date. That incentive can make early exercise of an American call optimal in some cases (particularly just before a dividend payment, when the call is deep in the money and time value is small). A common condition expressed in terms of a dividend amount ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mi, { children: "i" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_i" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3117em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "i" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " at time ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "T" }), _jsx(_components.mi, { children: "i" })] }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "T_i" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "T" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3117em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.1389em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "i" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] })] }) })] }), " is:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "D" }), _jsx(_components.mi, { children: "i" })] }), _jsx(_components.mo, { children: "≤" }), _jsx(_components.mi, { children: "X" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mn, { children: "1" }), _jsx(_components.mo, { children: "−" }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "r" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "T" }), _jsx(_components.mi, { children: "i" })] }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "t" }), _jsx(_components.mo, { stretchy: "false", children: ")" })] })] }), _jsx(_components.mo, { stretchy: "false", children: ")" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "D_i \\le X(1 - e^{-r(T_i-t)})" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.8333em", verticalAlign: "-0.15em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.02778em" }, children: "D" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3117em" }, children: _jsxs(_components.span, { style: { top: "-2.55em", marginLeft: "-0.0278em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "i" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.15em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "≤" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1em", verticalAlign: "-0.25em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.07847em" }, children: "X" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "1" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "−" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.138em", verticalAlign: "-0.25em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mord mathnormal", children: "e" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.888em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.02778em" }, children: "r" }), _jsx(_components.span, { className: "mopen mtight", children: "(" }), _jsxs(_components.span, { className: "mord mtight", children: [_jsx(_components.span, { className: "mord mathnormal mtight", style: { marginRight: "0.13889em" }, children: "T" }), _jsx(_components.span, { className: "msupsub", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsx(_components.span, { className: "vlist", style: { height: "0.3281em" }, children: _jsxs(_components.span, { style: { top: "-2.357em", marginLeft: "-0.1389em", marginRight: "0.0714em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.5em" } }), _jsx(_components.span, { className: "sizing reset-size3 size1 mtight", children: _jsx(_components.span, { className: "mord mathnormal mtight", children: "i" }) })] }) }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.143em" }, children: _jsx(_components.span, {}) }) })] }) })] }), _jsx(_components.span, { className: "mbin mtight", children: "−" }), _jsx(_components.span, { className: "mord mathnormal mtight", children: "t" }), _jsx(_components.span, { className: "mclose mtight", children: ")" })] }) })] }) }) }) }) })] }), _jsx(_components.span, { className: "mclose", children: ")" })] })] })] }), "\nas a sufficient-type inequality for when early exercise is not optimal at that dividend date (details depend on model setup and assumptions). The main exam-level point is directionally simple:"] }), "\n", _jsxs(_components.ul, { children: ["\n", _jsx(_components.li, { children: "Dividends decrease call values (relative to no dividends) and can make early exercise of American calls more likely." }), "\n", _jsx(_components.li, { children: "Dividends increase put values (relative to no dividends) and generally reduce incentives to exercise American puts early when dividends are larger." }), "\n"] }), "\n", _jsx(_components.h3, { children: "Link to linear vs nonlinear risk measurement" }), "\n", _jsxs(_components.p, { children: ["From a risk measurement viewpoint, a cash equity position moves one-for-one with the stock price. If you hold one share, the change in position value is approximately:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "P" }), _jsx(_components.mo, { children: "≈" }), _jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "S" })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta P \\approx \\Delta S" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "≈" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "S" })] })] })] }), "\nOptions are nonlinear: their delta changes with ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsx(_components.mrow, { children: _jsx(_components.mi, { children: "S" }) }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "S" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "S" })] }) })] }), " (gamma risk). For small moves, delta is a linear approximation; for larger moves, curvature matters:\n", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "P" }), _jsx(_components.mo, { children: "≈" }), _jsx(_components.mi, { children: "δ" }), _jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "S" }), _jsx(_components.mo, { children: "+" }), _jsxs(_components.mfrac, { children: [_jsx(_components.mn, { children: "1" }), _jsx(_components.mn, { children: "2" })] }), _jsx(_components.mi, { children: "γ" }), _jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mi, { mathvariant: "normal", children: "Δ" }), _jsx(_components.mi, { children: "S" }), _jsxs(_components.msup, { children: [_jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mn, { children: "2" })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "\\Delta P \\approx \\delta \\Delta S + \\frac{1}{2}\\gamma(\\Delta S)^2" })] }) }) }), _jsxs(_components.span, { className: "katex-html", "aria-hidden": "true", children: [_jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.6833em" } }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.13889em" }, children: "P" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } }), _jsx(_components.span, { className: "mrel", children: "≈" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2778em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.7778em", verticalAlign: "-0.0833em" } }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.03785em" }, children: "δ" }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "S" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } }), _jsx(_components.span, { className: "mbin", children: "+" }), _jsx(_components.span, { className: "mspace", style: { marginRight: "0.2222em" } })] }), _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "1.1901em", verticalAlign: "-0.345em" } }), _jsxs(_components.span, { className: "mord", children: [_jsx(_components.span, { className: "mopen nulldelimiter" }), _jsx(_components.span, { className: "mfrac", children: _jsxs(_components.span, { className: "vlist-t vlist-t2", children: [_jsxs(_components.span, { className: "vlist-r", children: [_jsxs(_components.span, { className: "vlist", style: { height: "0.8451em" }, children: [_jsxs(_components.span, { style: { top: "-2.655em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsx(_components.span, { className: "mord mtight", children: "2" }) }) })] }), _jsxs(_components.span, { style: { top: "-3.23em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "frac-line", style: { borderBottomWidth: "0.04em" } })] }), _jsxs(_components.span, { style: { top: "-3.394em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "3em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: _jsx(_components.span, { className: "mord mtight", children: "1" }) }) })] })] }), _jsx(_components.span, { className: "vlist-s", children: "" })] }), _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.345em" }, children: _jsx(_components.span, {}) }) })] }) }), _jsx(_components.span, { className: "mclose nulldelimiter" })] }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05556em" }, children: "γ" }), _jsx(_components.span, { className: "mopen", children: "(" }), _jsx(_components.span, { className: "mord", children: "Δ" }), _jsx(_components.span, { className: "mord mathnormal", style: { marginRight: "0.05764em" }, children: "S" }), _jsxs(_components.span, { className: "mclose", children: [_jsx(_components.span, { className: "mclose", children: ")" }), _jsx(_components.span, { className: "msupsub", children: _jsx(_components.span, { className: "vlist-t", children: _jsx(_components.span, { className: "vlist-r", children: _jsx(_components.span, { className: "vlist", style: { height: "0.8141em" }, children: _jsxs(_components.span, { style: { top: "-3.063em", marginRight: "0.05em" }, children: [_jsx(_components.span, { className: "pstrut", style: { height: "2.7em" } }), _jsx(_components.span, { className: "sizing reset-size6 size3 mtight", children: _jsx(_components.span, { className: "mord mtight", children: "2" }) })] }) }) }) }) })] })] })] })] }), "\nDividends affect option deltas and gammas because they change forward prices and the option’s moneyness distribution over time. In VaR terms, this is one reason delta-normal VaR is often a rough approximation for portfolios with meaningful option exposure: the distribution of option P&L can be skewed even if the return distribution of the stock itself is treated as normal."] }), "\n", _jsx(_components.h2, { children: _jsx(_components.strong, { children: "Summary" }) }), "\n", _jsx(_components.p, { children: "Dividend-based valuation and relative valuation solve different problems. The DDM anchors equity value in the present value of expected dividends discounted at a cost of equity, with the Gordon growth model as the standard constant-growth special case. Multistage DDM adds realism by forecasting explicit dividends for a finite horizon and using a terminal value to represent long-run stable growth." }), "\n", _jsx(_components.p, { children: "Relative valuation uses market pricing of comparable firms through multiples such as P/E and P/B. It is quick and common, but it inherits peer-group selection risk, accounting differences, and the possibility that the overall market is mispriced. For FRM candidates, it is important to connect multiples back to discount rates and growth: changes in risk premia and interest rates can move multiples even without new cash flow information." }), "\n", _jsxs(_components.p, { children: ["Dividends also enter derivative valuation through no-arbitrage relationships. A dividend yield reduces the forward price from ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "S" }), _jsx(_components.mn, { children: "0" })] }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mi, { children: "r" }), _jsx(_components.mi, { children: "T" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "S_0 e^{rT}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": "true", children: _jsxs(_components.span, { className: "base", children: [_jsx(_components.span, { className: "strut", style: { height: "0.9913em", verticalAlign: "-0.15em" } 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}) })] }), " to ", _jsxs(_components.span, { className: "katex", children: [_jsx(_components.span, { className: "katex-mathml", children: _jsx(_components.math, { xmlns: "http://www.w3.org/1998/Math/MathML", children: _jsxs(_components.semantics, { children: [_jsxs(_components.mrow, { children: [_jsxs(_components.msub, { children: [_jsx(_components.mi, { children: "S" }), _jsx(_components.mn, { children: "0" })] }), _jsxs(_components.msup, { children: [_jsx(_components.mi, { children: "e" }), _jsxs(_components.mrow, { children: [_jsx(_components.mo, { stretchy: "false", children: "(" }), _jsx(_components.mi, { children: "r" }), _jsx(_components.mo, { children: "−" }), _jsx(_components.mi, { children: "q" }), _jsx(_components.mo, { stretchy: "false", children: ")" }), _jsx(_components.mi, { children: "T" })] })] })] }), _jsx(_components.annotation, { encoding: "application/x-tex", children: "S_0 e^{(r-q)T}" })] }) }) }), _jsx(_components.span, { className: "katex-html", "aria-hidden": 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Equity and derivative valuation basics - Dividend discount and relative valuation (overview)