THE IMPACT OF CORPORATE GROWTH ON THE RISK OF COMMON STOCKS

Abstract

THE ORIGINAL WORK of Irving Fisher' on the application of the theory of consumer choice to the problem of allocating resources over time provides the classical economic foundation for the current theory of dividend valuation. If the future is known with certainty and capital markets are perfect the conditions of general equilibrium are such that the interest rate in each future period is equal to every individual's marginal rate of time preference for that period and the supply of loanable funds is equal to the quantity demanded. The theory is widely accepted as useful and it provides the rationale for discounting future income in order to arrive at its present value. The application of such discounting to the problem of common stock valuation is presented in the classic work of J. B. Williams.2 If the dividend per share of stock at the end of period t is denoted by Dt and if it denotes the general equilibrium rate of interest that reflects the marginal rate of time preference of every individual with respect to period t resource allocation then the value of the share at the end of period zero is given by