We have valued stocks of publicly traded corporations as perpetuities. Is this a reasonable method? Since an investor will likely not own the stock forever, would it make more sense to just value a dividend stream for the next three years and then assume the stock is sold?

We have valued stocks of publicly traded corporations as perpetuities. Is this a reasonable method? Since an investor will likely not own the stock forever, would it make more sense to just value a dividend stream for the next three years and then assume the stock is sold?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 2Q: Two investors are evaluating General Electric’s stock for possible purchase. They agree on the...

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1) A reasonable way to put a value on a share of stock is to discount the stream of expected future dividends (annual payments to the shareholder) by the so-called opportunity cost of money (the interest rate you could get from the bank if you didn't hold on to the stock). If a share of stock is anticipated to pay a $5 dividend annually for the next five years and then $8 every year after that in perpetuity, what would the share be worth according to this model if the cost of money is 4%? Dividends are paid at the end of a year.
Suppose a stock is not currently paying dividends, and its management has announced that it will not pay a dividend for several years, but that it does expect to start paying dividends sometime in the future. Under these conditions, which of the following statements is most correct? Since it is expected to someday pay dividends, the value of the stock today can be found with this equation: PO = D1/(r - g). Under these conditions, we can estimate a value for the stock, but we cannot use any form of the constant growth DCF model to do so. Such a stock should have a value of zero until it actually begins paying dividends. The value of the stock can be found using DCF procedures by finding the present value of expected future dividends accounting for their timing and amount.
What is the difference between a dividend and a stock repurchase? Why have stock repurchases becoming increasingly popular over the last several years?
Please solve step by step for clarity, thank you!
Steady Growth Industries has never missed a dividend payment in its 94-year history. Does this make it more attractive to you as a possible purchase for your stock portfolio?
23. Suppose a stock is not currently paying dividends, and its management has announced that it will not pay a dividend for several years, but that it does expect to start paying dividends sometime in the future. Under these conditions, which of the following statements is most correct? a. The value of the stock can be found using DCF procedures by finding the present value of expected future dividends accounting for their timing and amount. b.Since it is expected to someday pay dividends, the value of the stock today can be found with this equation: P0 = D1/(r - g). c. Under these conditions, we can estimate a value for the stock, but we cannot use any form of the constant growth DCF model to do so. d. Such a stock should have a value of zero until it actually begins paying dividends.
Two investors are evaluating GE’s stock for possible purchase. They agree on the expected value of and on the expected future dividend growth rate. Further, they agree on the riskiness of the stock. However, one investor normally holds stocks for 2 years, while the other holds stocks for 10 years. On the basis of the type of analysis done in this chapter, should they both be willing to pay the same price for GE’s stock? Explain.
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
Solve the question step-by-step with comprehensive explanation where required.
Lahhey Publishing wishes to estimate the value of its outstanding preferred stock. The preferred stock has a RM50 par value and pays an annual dividend of RM7 50 per share and currently earning an 8% annual rate of return. i) Calculate the market value of the outstanding preferred stock. ii) If an investor purchases the preferred stock at the value calculated in part (a), how much does she gain or lose per share if she sells the stock when the required return on preferred stock has fallen to 6%. Explain
Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has a par value of $60 and pays an annual dividend of $5.60 per share. Similar-risk preferred stocks are currently earning an annual rate of return of 7.1%. a. What is the market value of the outstanding preferred stock? b. If an investor purchases the preferred stock at the value calculated in part a, how much does she gain or lose per share if she sells the stock when the required return on similar-risk preferred stocks has risen to 8.6%?
You bought a stock one year ago for $48.45 per share and sold it today for $57.58 per share. It paid a $1.93 per share dividend today. If you assume that the stock fell $5.23 to $43.22 instead. Is your capital gain different? Why or why not?