As with bonds, the price of the stock is the present value of these

expected cash flows

Constant dividend:
Growth rate of dividends is 0%
Referred to as a zero growth stock because the dividend is
constant rather than increasing
Preferred stock is the classic example of a constant dividend,
A constant dividend stock is valued as perpetuity.
Neither the dividend nor the price needs a time reference, as
both are constant over time given a fixed rate of return.
D
P0
R

o P is PV of stock
Constant dividend growth:
Dividend growth rate is greater than 0%
As the growth rate approaches the required return, the stock
price increases dramatically (positive relationship between
dividend growth rate g and stock price)
As the required return approaches the growth rate, the price
increases dramatically (negative relationship between r and p) If
r goes up p goes up
o R- return on investment/ discount rate
o P= stock price
Cash flow for a growing dividend is called a growing perpetuity
D
P0 1
R g

Supernormal growth:
Dividend growth rate is not constant
Here's a hint for solving this type of problem: Start at eternity
and work your way back to today.
Point out that P2 is the value, at year 2, of all expected dividends
year 3 on.