1. The value of any kind of investment relies on its cash flows; i.e., what investors will certainly actually receive. Thecash flows from a re-superstructure of stock are the dividends
A an extensive percentage of the companies noted on the NYSE and the NASDAQdon"t salary dividends, however investors are nevertheless willing come buy shares in them. How is this possiblegiven her answer come the vault question?
Investors believe the agency will at some point start payment dividends (or be marketed to an additional company).

You are watching: Why does the value of a share of stock depend on dividends?

Under what two assumptions can we use the dividend expansion modelpresented in the thing to recognize the worth of a share of stock?
(i) if dividends space expectedto occur forever; that is, the stock provides dividends in perpetuity, and (ii) if a constant growth rateof dividends wake up forever
Suppose a agency has a wanted stock issue and also a commonstock issue. Both have just paid a $2 dividend. Which do you think will have actually a higher price, a share of thepreferred or a share of the common?
The typical stock probably has actually a higher price because the dividend have the right to grow, whereas it is resolved onthe preferred. However, the desired is less risky since of the dividend and liquidation preference,so it is possible the preferred could be worth more, relying on the circumstances.
Based ~ above the dividend growth model, what are the two components of thetotal return on a share of stock? Which carry out you think is generally larger?
The two materials are the dividend yield and also the resources gains yield. For most companies, the capitalgains yield is larger. This is simple to view for carriers that pay no dividends. For service providers that dopay dividends, the dividend yields are seldom over five percent and also are often much less.
In the context of the dividend expansion model, is that true that the development rate in dividendsand the expansion rate in the price of the stock room identical?
The dividend expansion model renders the implicit presumption that the share price will grow at the sameconstant price as the dividend. What this means is that if the cash operation on one investment thrive at aconstant price through time, the worth of that invest grows in ~ the same rate as the cash flows.
Is it feasible for a agency to salary dividends once it has actually a an adverse netincome for the year? might this take place for much longer periods?
The firm might have hopeful operating cash circulation with negativeearnings, market fixed assets, reduce net functioning capital, or advanced cash from creditor in order come paydividends. While this is possible in the short term, as a valuable matter over the longer term, thecompany would more than likely need to have actually a hopeful net income (at the very least on average) in order to maintaina dividend.
It wouldn"t seem to be. Investors who don"t choose the voting functions of a certain class of stock areunder no duty to purchase it.
Some companies, such together Google, have produced classes of stock with little or novoting civil liberties at all. Why would investors buy together stock?
Investors buy together stock due to the fact that they desire it, recognizing the the shares have actually no vote power.Presumably, investor pay less for together shares 보다 they would certainly otherwise.
Evaluate the complying with statement: supervisors should not focus on the present stockvalue because doing therefore will cause an overemphasis ~ above short-term revenues at the expense of long-termprofits
Presumably, the current stock value shows the risk, timing, and magnitude of every future cash flows,both short-term and also long-term. If this is correct, then the statement is false.
In the consistent dividend expansion model, what is the highestreasonable growth rate for a stock"s dividend?
A reasonable limit for the growth rate is the expansion rate that the economy, i m sorry in the U.S. Hashistorically been about 3 to 3.5 percent (after bookkeeping for inflation). As we will view in a later chapter,inflation has historically averaged about 3 percent, therefore 6 to 6.5 percent (before accountancy for inflation)would it is in a reasonable limit.
In the chapter, we pointed out that many companies have been under press todeclassify your boards of directors. Why would certainly investors desire a board to be declassified? What space theadvantages the a divide board?
In a declassified board, every board seat is up for election every year. This structure enables investorsto vote the end a manager (and also the entire board) much an ext quickly if investors are dissatisfied. However, this structure likewise makes that more difficult to fight turn off a hostile takeover bid. In contrast, a classified board can much more effectively negotiate on behalf of stockholders, perhaps securing much better terms in a deal. Classified boards are additionally important because that institutional memory. If an entire board to be voted out in a solitary year, there would certainly be no board members obtainable to advice the company"s directionwith regards come previous decisions.

See more: Give It To Mikey He Ll Eat Anything, Give It To Mikey, He'Ll Eat Anything

The major an obstacle in using price ratio evaluation is identify the exactly benchmark PE ratio. In aprevious chapter, we showed how the sustainable expansion rate is determined, and in a future chapterwe will talk about the required return. Back not precise measures, the development rate and required returnhave a solid financial basis. With the PE ratio, like any other ratio, that is complicated to recognize whatthe ratio have to be. Due to the fact that a little difference in the PE ratio have the right to have a far-ranging effect on thecalculated share price, it is basic to come at an incorrect valuation.