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FIN 300 Study Guide - Dividend Yield, Preferred Stock, Financial Instrument

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School
Ryerson University
Department
Finance
Course
FIN 300
Professor
Scott Anderson

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Document Summary

Only one correction q 5 in solutions. Answers to concepts review and critical thinking questions. The value of any investment depends on its cash flows; i. e. , what investors will actually receive. The cash flows from a share of stock are the dividends. Investors believe the company will eventually start paying dividends (or be sold to another company). In general, companies that need the cash will often forgo dividends since dividends are a cash expense. Young, growing companies with profitable investment opportunities are one example; another example is a company in financial distress. This question is examined in depth in a later chapter. The general method for valuing a share of stock is to find the present value of all expected future dividends. The dividend growth model presented in the text is only valid (i) if dividends are expected to occur forever, that is, the stock provides dividends in perpetuity, and (ii) if a constant growth rate of dividends occurs forever.

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Related Questions

General Cereal common stock dividends have been growing at an annual rate of 7 percent per year over the past 10 years. Current dividends are $1.70 per share. What is the current value of a share of this stock to an investor who requires a 12 percent rate of return if the following conditions exist?

A. Dividends are expected to continue growing at the historic rate for the foreseeable future.

B. The dividend growth rate is expected to increase to 9 percent per year.

C. The dividend growth rate is expected to decrease to 6.5 percent per year.

A. IBIS Corporation has had dividends grow from $2.50per share to $6.50 per share over the last 10years (the $6.50 per share dividend was paid yesterday; that is, D0= $6.50). This compounded annual growth rate in dividends is expected to continue into the future forever. If the current market price of IBIS’s stock is $45.00 per share, what rate of return do investors expect to receive from buying IBIS stock?

B. Phillips, Inc. just paid a dividend of $3.25 per share on its common stock (that is, D0= 3.25). Investors expect the dividend to grow at 40% in years 1 and 2, they expect the dividend to grow at 20% in year 3 and they expect that all future dividends (that is, dividends in years 4, 5, ...,infinity) to grow at a constant rate of 5% per year. If the cost of capital for Phillips, Inc. stock is 15%, what is the current price of the stock?

--SHOW WORK PLEASE

Why does the value of a share of stock depend on dividends? Asubstantial percentage of the companies listed on the NYSE and theNASDAQ don’t pay dividends, but investors are nonetheless willingto buy shares in them. How is this possible given your answer tothe previous question? Referring to the previous questions, underwhat circumstances might a company choose not to pay dividends?