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10-5 Two investors are evaluating IBM’s stock for possible purchase. They agree on the expected value...

10-5 Two investors are evaluating IBM’s stock for possible purchase. They agree on the expected value of D1 and on the expected future dividend growth rate. They also agree on the riskiness of the stock. One investor normally holds stocks for two years, and the other normally holds stocks for 10 years. On the basis of the type of analysis presented in this chapter, they should both be willing to pay the same price for IBM’s stock. Is this statement correct? Explain.

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Answer #1

  

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The value of any stock based on the holding period will change. Keeping all other constant. i.e. The Holding period change will change the price of the Stock as it would yield different for both the investors.

The Value of Stock for the investor who wants to hold it for 2 years will be different from the Value of Stock for the investor who wants to hold it for 10 years.

Therefore the statement is not correct. The value of stock will be different for both the investors.

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NOTE: Please don't downvote directly. In case of query, I will solve it in comment section in no time.

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