ABSTRACT
In a world where risk-adjusted required returns are constant over time, the valuation of securities is straightforward—value is the present value of the expected dividend stream discounted at the appropriate discount rate, or PV=ΣE [Dt]/(1+k) t . If earnings (and dividends) are expected to fluctuate cyclically, then stock value will also fluctuate cyclically, depending on the stage of the business cycle. If dividends oscillate in a sinusoidal form between $6.00 and $14.00 over a 20-period economic cycle, and the required return is 10 percent per period, then security prices will fluctuate between $111.55 and $88.45 as shown in Figure 6.1. 1
