1. The value of any kind of investment depends on its cash flows; i.e., what investors will actually obtain. Thecash flows from a share of stock are the dividends
A extensive percent of the companies detailed on the NYSE and the NASDAQdon"t pay dividends, however investors are nonethemuch less willing to buy shares in them. How is this possiblegiven your answer to the previous question?
Investors believe the firm will eventually start paying dividends (or be offered to one more company).

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Under what two assumptions can we usage the dividend expansion modelpresented in the chapter to identify the worth of a share of stock?
(i) if dividends are expectedto happen forever; that is, the stock provides dividends in perpetuity, and also (ii) if a consistent expansion rateof dividends occurs forever
Suppose a firm has a wanted stock issue and a commonstock worry. Both have actually simply paid a $2 dividend. Which perform you think will have actually a greater price, a share of thedesired or a share of the common?
The widespread stock most likely has actually a higher price bereason the dividend deserve to grow, whereas it is solved onthe preferred. However before, the desired is much less riskies bereason of the dividend and liquidation preference,so it is feasible the desired might be worth even more, depending upon the situations.
Based on the dividend expansion model, what are the 2 components of thefull rerevolve on a share of stock? Which execute you think is commonly larger?
The 2 components are the dividend yield and the capital gains yield. For most carriers, the capitalgains yield is larger. This is simple to check out for carriers that pay no dividends. For suppliers that dopay dividends, the dividfinish returns are rarely over 5 percent and are frequently much less.
In the context of the dividfinish development model, is it true that the development price in dividendsand also the development rate in the price of the stock are identical?
The dividfinish expansion model makes the implicit presumption that the stock price will certainly prosper at the samecontinuous price as the dividfinish. What this suggests is that if the cash flows on an investment prosper at aconstant price through time, the worth of that investment grows at the same rate as the cash flows.
Is it possible for a agency to pay dividends as soon as it has an unfavorable netincome for the year? Could this take place for longer periods?
The firm could have positive operating cash flow with negativeearnings, offer fixed assets, alleviate net functioning capital, or raise cash from creditors in order to paydividends. While this is possible in the brief term, as a handy issue over the much longer term, theagency would more than likely must have a positive net earnings (at least on average) in order to maintaina dividend.
It wouldn"t seem to be. Investors who don"t like the voting attributes of a certain course of stock areunder no obligation to buy it.
Some service providers, such as Google, have produced classes of stock with little or novoting legal rights at all. Why would certainly investors buy such stock?
Investors buy such stock bereason they want it, recognizing that the shares have actually no voting power.Presumably, investors pay less for such shares than they would certainly otherwise.
Evaluate the following statement: Managers need to not focus on the current stockvalue because doing so will certainly lead to an overemphasis on short-lived earnings at the cost of long-termprofits
Presumably, the current stock value shows the hazard, timing, and also magnitude of all future cash flows,both momentary and also permanent. If this is correct, then the statement is false.
In the constant dividfinish development version, what is the highestreasonable development price for a stock"s dividend?
A reasonable limit for the development price is the expansion price of the economy, which in the UNITED STATE hashistorically been around 3 to 3.5 percent (after audit for inflation). As we will certainly check out in a later on chapter,inflation has actually historically averaged about 3 percent, so 6 to 6.5 percent (before audit for inflation)would be a reasonable limit.
In the chapter, we pointed out that many type of 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, every board seat is up for election yearly. This structure enables investorsto vote out a director (and even the entire board) a lot even more conveniently if investors are dissatisfied. However, this framework likewise provides it even more challenging to fight off a hostile takeover bid. In comparison, a classified board deserve to more effectively negotiate on behalf of stockholders, possibly securing much better terms in a deal. Classified boards are also necessary for institutional memory. If a whole board were voted out in a single year, there would certainly be no board members available to evaluate the company"s directionvia regards to previous decisions.

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The significant difficulty in using price proportion evaluation is determining the correct benchmark PE ratio. In aprevious chapter, we proved just how the sustainable development rate is established, and also in a future chapterwe will certainly talk about the forced return. Although not specific measures, the expansion rate and also required returnhave actually a solid economic basis. With the PE proportion, favor any type of various other ratio, it is hard to determine whatthe ratio must be. Since a tiny difference in the PE ratio deserve to have actually a far-ranging impact on thecalculated stock price, it is basic to arrive at an incorrect valuation.

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