I need some clarification, hopefully someone can help. On page 250 of Equities, Example 4, Solution 2 states that two investors with different holding periods but the same expectations and required rate of return will have similar intrinsic values for a security because - intrinsic value of a security is independent of the investor’s holding period. To me this doesn’t make sense because according to the Dividend Discount Model the intrinsic value of a security is is the present value of the future benefits expected to be recieved so, wouldn’t an investor with a longer holding period have a higher intrinsic value as compared to an investor with a shorter holding period because of more cash flows being discounted back over a longer term? Thanks
You’re assuming that the cash flows for the two investors are equal; they’re not. Suppose Bob and Mary both buy a dividend-paying stock; Bob plans to hold it for two years, while Mary plans to hold it for ten years. At the end of two years, Bob sells the stock and gets a cash flow in the amount of the price of the stock; Mary, on the other hand, gets a dividend. Bob’s two-year cash flow is higher than Mary’s to compensate him for losing out on eight more years of dividends.
The intrinsic value is called “intrinsic” because it is a value that depends on the security, not on the investor.
You’re welcome.
That makes sense - I didn’t see it that way! Appreciate your help!
My pleasure.