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Category: Finance
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Experience:  MBA in Finance and Marketing
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Two investors are evaluating General Motors stock for possible

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Two investors are evaluating General Motors' stock for possible purchase. they agree on expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the risk of the stock. However, one investor normally holds stocks for 2 years, while the other normally holds stock for 10 years. on the basis of the type of analysis done in this chapter, they should both be willing to pay the same price for GM stock. T or F? explain
Submitted: 8 years ago.
Category: Finance
Expert:  vinsu replied 8 years ago.

The answer is true. The value of a share of stock is the present value of its expected future dividends. If the two investors expect the same future dividends and they agree on the stock's riskiness (implying the discount rate is the same), then they should reach a similar stock value using the dividend discount model which discounts the dividends and uses growth rate and required return and these are same for both the investors. The time period is not material, since both the investors would discount all future dividends to get the price today and so both would arrive at the same price.

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Customer: replied 8 years ago.
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