Perpetual bonds are those type of bonds which don’t have any maturity date. Its price is the PV of its current interest payment with no finite end date. It thus pays the interest rate but with no finite end date, the only way to get back the face amount of the bond is by selling it (Hatchondo & Martinez, 2009). Preferred stocks on the other hand often always pays a fixed dividend. This fixed payout of dividends in a way disowns the holders from the benefit of the organizational growth. These types of stock go upto perpetuity as well. These stockholders are paid the dividends before the common stockholders however they don’t have the voting rights. Common stocks come with the voting rights meaning the one with majority shares can even control the company. Higher earning of the company can make the stock price of the company go up. Both stock price and interest rate can go up in the same direction in this form of investment/holdings. These type of stocks aren’t callable unlike the other two. They do continue upto perpetuity.
The dividend growth model is used as a way to get the valuation of the company’s bond or stock without any constraint to the outer industrial conditions (Barnes, 2015). Any investor expects to get the return out of their investment when they allow the business to use their money to meet the financial need of the company. The payment that the company makes to the investor at a fixed period of time is called as a dividend. The zero growth of dividend means that the stock will yield constant return year by year. This model is thus considered to be more of a theoretical approach rather than practically feasible. As all the three values we’ve continue upto perpetuity, the present value of stock with zero growth can be calculated using the formula dividends per period divided by the required rate of return of each period (Miller & Modigliani, 1961). They yield the same return which is always fixed and with the constant dividends, return is fixed for as long as the company is in existence. Also, from the above formula, both the parameters are same for all three - perpetual bond, preferred stock and common stock and thus the present value is obtained to be same (considering both the dividend and the required rate is same for the same level of investment).
References
Barnes, P. (2015). Dividend Growth Model. Wiley Encyclopedia Of Management , 1-4.
Hatchondo, J., & Martinez, L. (2009). Long-duration bonds and sovereign defaults. Journal Of International Economics , 79 (1), 117-125.
Miller, M., & Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares. The Journal Of Business , 34 (4), 411-413.
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Perpetual bonds are those type of bonds which don’t have any maturity date. Its price is the PV of its current interest payment with no finite end date. It thus pays the interest rate but with no finite end date, the only way to get back the face amount of the bond is by selling it (Hatchondo & Martinez, 2009). Preferred stocks on the other hand often always pays a fixed dividend. This fixed payout of dividends in a way disowns the holders from the benefit of the organizational growth. These types of stock go upto perpetuity as well. These stockholders are paid the dividends before the common stockholders however they don’t have the voting rights. Common stocks come with the voting rights meaning the one with majority shares can even control the company. Higher earning of the company can make the stock price of the company go up. Both stock price and interest rate can go up in the same direction in this form of investment/holdings. These type of stocks aren’t callable unlike the other two. They do continue upto perpetuity.
The dividend growth model is used as a way to get the valuation of the company’s bond or stock without any constraint to the outer industrial conditions (Barnes, 2015). Any investor expects to get the return out of their investment when they allow the business to use their money to meet the financial need of the company. The payment that the company makes to the investor at a fixed period of time is called as a dividend. The zero growth of dividend means that the stock will yield constant return year by year. This model is thus considered to be more of a theoretical approach rather than practically feasible. As all the three values we’ve continue upto perpetuity, the present value of stock with zero growth can be calculated using the formula dividends per period divided by the required rate of return of each period (Miller & Modigliani, 1961). They yield the same return which is always fixed and with the constant dividends, return is fixed for as long as the company is in existence. Also, from the above formula, both the parameters are same for all three - perpetual bond, preferred stock and common stock and thus the present value is obtained to be same (considering both the dividend and the required rate is same for the same level of investment).
References
Barnes, P. (2015). Dividend Growth Model. Wiley Encyclopedia Of Management , 1-4.
Hatchondo, J., & Martinez, L. (2009). Long-duration bonds and sovereign defaults. Journal Of International Economics , 79 (1), 117-125.
Miller, M., & Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares. The Journal Of Business , 34 (4), 411-413.