Stochastic Dividend Discount Model: Risk and Return

One of the most widely used method to assess the company's stock price consists in computing the present value of all future dividends. Our approach is to present a general discrete time dividend valuation model when the dividend growth rate is a general continuous variable. Assuming that the dividend growth rate follows a discrete time semi-Markov chain with measurable phase space, we furnish sufficient conditions that guarantee finiteness of prices and risks and new equations that describe the first and second order price dividend ratios. Approximation methods to solve the equations are provided and some new results for semi-Markov reward processes with Borel state space are established. The paper generalizes previous contributions dealing with pricing firms on the basis of fundamentals.