Essentials of Corporate Finance
8th Edition
ISBN: 9780078034756
Author: Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 7, Problem 7.1ACQ
What are the relevant cash flows for valuing a share of common stock?
Expert Solution & Answer
Summary Introduction
To discuss: The relevant cash flows to value a share of common stock.
Introduction:
The common stock is a security in which the shareholder (investor) invests their money in the corporation as equity. The valuation of a share of common stock is very difficult to interpret. It is because the common stock dividends are not easy to estimate while comparing with the principal payment on a bond of preferred stock and interest.
Explanation of Solution
The expected future dividends are the most significant cash flows for valuing the share of common stock. It is because the cash flows received during the life of the stock are only the regular dividends.
The present value of stock prices is equivalent towards the present value of the future dividends of a particular company. The corporation pays these expected dividends to their respective shareholders. Therefore, dividend is considered as the relevant cash flow to determine the value of share.
Conclusion
The dividend paid by the company is the most important cash flow for valuing the stocks. This dividend distributed by the company is the cash flow expected only during the life of the stock.
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Chapter 7 Solutions
Essentials of Corporate Finance
Ch. 7 - What are the relevant cash flows for valuing a...Ch. 7 - Does the value of a share of stock depend on how...Ch. 7 - What is the value of a share of stock when the...Ch. 7 - What is a target price on a stock? How is it...Ch. 7 - Prob. 7.2ACQCh. 7 - Prob. 7.2BCQCh. 7 - Why is preferred stock called preferred?Ch. 7 - Prob. 7.3ACQCh. 7 - Prob. 7.3BCQCh. 7 - Prob. 7.3CCQ
Ch. 7 - Prob. 7.3DCQCh. 7 - Prob. 7.1CCh. 7 - Prob. 7.2CCh. 7 - LO1 7.1.Stock Valuation. Why does the value of a...Ch. 7 - LO1 7.2.Stock Valuation. A substantial percentage...Ch. 7 - Dividend Policy. Referring to the previous...Ch. 7 - LO1 7.4.PRINTED BY: V.SwathiPpfeya@spi-global.com....Ch. 7 - LO1 7.5.Common versus Preferred Stock. Suppose a...Ch. 7 - Prob. 6CTCRCh. 7 - Prob. 7CTCRCh. 7 - LO1 7.8.Dividends and Earnings. Is it possible for...Ch. 7 - Prob. 9CTCRCh. 7 - Prob. 10CTCRCh. 7 - Prob. 11CTCRCh. 7 - Prob. 12CTCRCh. 7 - Prob. 13CTCRCh. 7 - Prob. 14CTCRCh. 7 - Prob. 1QPCh. 7 - Prob. 2QPCh. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Prob. 5QPCh. 7 - Prob. 6QPCh. 7 - Prob. 7QPCh. 7 - Prob. 8QPCh. 7 - Prob. 9QPCh. 7 - Prob. 10QPCh. 7 - Prob. 11QPCh. 7 - Prob. 12QPCh. 7 - Prob. 13QPCh. 7 - Prob. 14QPCh. 7 - Prob. 15QPCh. 7 - Prob. 16QPCh. 7 - Prob. 17QPCh. 7 - Prob. 18QPCh. 7 - Prob. 19QPCh. 7 - Prob. 20QPCh. 7 - Prob. 21QPCh. 7 - Prob. 22QPCh. 7 - Prob. 23QPCh. 7 - Prob. 24QPCh. 7 - Prob. 25QPCh. 7 - Prob. 26QPCh. 7 - Prob. 27QPCh. 7 - Prob. 28QPCh. 7 - Prob. 29QPCh. 7 - Prob. 30QPCh. 7 - Prob. 31QPCh. 7 - Prob. 32QPCh. 7 - Prob. 1CCCh. 7 - Prob. 2CC
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