1. The value of any investment counts on its cash flows; i.e., what investors will actually receive. Thecash flows from a share of stock are the dividends
A comprehensive portion of the carriers listed on the NYSE and also the NASDAQdo not pay dividends, but investors are nonethemuch less willing to buy shares in them. How is this possibleoffered your answer to the previous question?
Investors think the agency will certainly eventually begin paying dividends (or be marketed to an additional company).

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Under what two presumptions can we use the dividfinish development modelpresented in the chapter to identify the worth of a share of stock?
(i) if dividends are expectedto take place forever; that is, the stock offers dividends in perpetuity, and (ii) if a constant growth rateof dividends occurs forever
Suppose a firm has actually a preferred stock issue and also a commonstock problem. Both have actually just passist a $2 dividfinish. Which execute you think will have a greater price, a share of thewanted or a share of the common?
The prevalent stock probably has a greater price because the dividend can grow, whereas it is resolved onthe wanted. However before, the desired is much less riskies because of the dividend and also liquidation choice,so it is feasible the desired could be worth even more, depending upon the situations.
Based on the dividend development design, what are the 2 components of thecomplete rerevolve on a share of stock? Which perform you think is generally larger?
The two components are the dividend yield and the resources gains yield. For a lot of suppliers, the capitalgains yield is bigger. This is simple to watch for carriers that pay no dividends. For companies that dopay dividends, the dividfinish returns are rarely over 5 percent and are frequently much less.
In the context of the dividend development design, is it true that the growth price in dividendsand also the expansion price in the price of the stock are identical?
The dividend development model provides the implicit assumption that the stock price will thrive at the sameconstant rate as the dividfinish. What this means is that if the cash flows on an investment thrive at aconsistent rate with time, the value of that investment grows at the exact same price as the cash flows.
Is it possible for a agency to pay dividends when it has actually an adverse netearnings for the year? Could this occur for longer periods?
The firm could have positive operating cash circulation through negativerevenue, sell fixed assets, mitigate net functioning funding, or raise cash from creditors in order to paydividends. While this is possible in the short term, as a valuable matter over the longer term, thefirm would probably need to have actually a positive net income (at leastern on average) in order to maintaina dividend.
It wouldn"t seem to be. Investors that do not like the voting features of a certain course of stock areunder no responsibility to buy it.
Some suppliers, such as Google, have created classes of stock with little bit or novoting civil liberties at all. Why would certainly investors buy such stock?
Investors buy such stock bereason they want it, recognizing that the shares have no voting power.Presumably, investors pay much less for such shares than they would certainly otherwise.
Evaluate the adhering to statement: Managers should not emphasis on the current stockvalue bereason doing so will lead to an overfocus on short-term revenues at the cost of long-termprofits
Presumably, the present stock value mirrors the risk, timing, and magnitude of all future cash flows,both temporary and permanent. If this is correct, then the statement is false.
In the consistent dividfinish development design, what is the highestreasonable expansion price for a stock"s dividend?
A reasonable limit for the expansion price is the growth price of the economic climate, which in the UNITED STATE hashistorically been about 3 to 3.5 percent (after accountancy for inflation). As we will see in a later on chapter,inflation has historically averaged about 3 percent, so 6 to 6.5 percent (prior to accountancy for inflation)would be a reasonable limit.
In the chapter, we stated that many service providers have been under press todeclassify their boards of directors. Why would certainly investors desire a board to be declassified? What are theadvantages of a classified board?
In a declassified board, eexceptionally board seat is up for election each year. This structure enables investorsto vote out a director (and also even the entire board) a lot even more easily if investors are dissatisfied. However, this structure likewise makes it even more tough to fight off a hostile takeover bid. In comparison, a classified board have the right to even more properly negotiate on befifty percent of stockholders, possibly securing better terms in a deal. Classified boards are also vital for institutional memory. If a whole board were voted out in a solitary year, tbelow would be no board members available to evaluate the company"s directionwith regards to previous decisions.

See more: What Family Has The Most Reactive Metals ? Solution: The Two Most Reactive Families


The significant challenge in making use of price ratio evaluation is determining the correct benchmark PE ratio. In aprevious chapter, we showed just how the sustainable growth price is determined, and in a future chapterwe will certainly comment on the required rerotate. Although not specific steps, the growth price and compelled returnhave actually a solid economic basis. With the PE ratio, choose any type of various other ratio, it is tough to recognize whatthe ratio have to be. Due to the fact that a little difference in the PE proportion can have actually a far-reaching impact on thecalculated stock price, it is basic to arrive at an incorrect valuation.
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