Two investors are evaluating General Electric\'s stock for possible purchase. Th

Question

Two investors are evaluating General Electric's stock for possible purchase. They agree on the expected value of D 1 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 and the other normally holds stocks for 10 years.  On the basis of the type of analysis done in this chapter (the difference between stock price and intrinsic value), they should both be willing to pay the same price for General Electric's stock.  True or False? Explain.

Explanation / Answer

True, both investor would agree on the price because both of them have same expectations on dividends and dividend growth rate and both have the same discount rate. The price that 1st investor would receive after 2 years would discount the future dividends and the price that 2nd investor would receive after 10 years would discount the future dividends too. Thus, both would agree on the price of the stock.

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