Question

Define each variable in the equation    P = (D1 + P1) / (1 + R)

Define each variable in the equation

   P = (D1 + P1) / (1 + R)

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Answer #1

P is the current price It is the intrisic value of a stock.

D1 is the expected dividend. It is the dividend that will be paid in year 1

P1 is the price in 1 year. It is the expected price at the end of year 1.

Therefore, D1 and P1 are future cash flows that needs to be discounted to find the intrinsic value.

R is the required rate on the stock. It is the minimum required rate the investors are expecting to earn.

Therefore, D1 and P1 are discounted using R ate time 1 to find P.

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