Final answer:
The dividend growth model is utilized for valuing stocks based on expected dividend growth. Accurate stock valuation requires weighing dividends and potential capital gains while considering different opinions on an investment's prospects. Ultimately, stock valuation reflects what an investor is willing to pay for future financial benefits.
Step-by-step explanation:
The student is asking about the dividend growth model, which is a method used in finance to value stocks based on the assumption that dividends will grow at a constant rate in perpetuity. Getting rich through investment seems straightforward: identify companies with potential for growth and profitability, or those that will be trendy and attractive to other buyers. Such companies tend to pay higher dividends or experience a rise in stock price, thereby providing the investor with a return on investment, either through dividends or capital gains.
In reality, predicting future profits is speculative, and the discount rate used to calculate present value is subject to debate. Investors need to consider both the dividends that might be paid and the potential capital gains from selling the stock in the future. Differences in opinion regarding these factors can lead to divergent investment decisions. Ultimately, investment comes down to what one is willing to pay now for anticipated future benefits.
When a company issues stock, investors expect a certain rate of return. This return can come in the form of dividends or capital gains, which represents the increase in value of the stock between the purchase and sale. For example, buying a stock for $45 and selling it later for $60 results in a $15 capital gain. Both dividends and capital gains are essential considerations in stock valuation.