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When Does the Share Price Equal the Present Value of Future Dividends? A Modified Dividend Approach

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  • Sethi, Suresh P

Abstract

This paper discusses an explicit necessary and sufficient condition on the dividend stream of a publicly traded company, under which the price of the company's share is equal to the present value of the future dividends that will accrue to it. When it is not, the share price equals the present value of the future per share dividend plus the limiting per share value of the company at infinity. It uses a well-accepted generalization of the Miller-Modigliani framework, and assumes that the firm is an infinite horizon firm which may engage in repurchasing its own shares. It develops a proper dividend approach that can value such a firm for any dividend stream. The paper concludes by clarifying some remarks in the Miller-Modigliani paper.

Suggested Citation

  • Sethi, Suresh P, 1996. "When Does the Share Price Equal the Present Value of Future Dividends? A Modified Dividend Approach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 307-319, August.
    • Handle: RePEc:spr:joecth:v:8:y:1996:i:2:p:307-19
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    Cited by:

    1. Nicole Bäuerle, 2004. "Approximation of Optimal Reinsurance and Dividend Payout Policies," Mathematical Finance, Wiley Blackwell, vol. 14(1), pages 99-113, January.

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