Chapter 8.1, Problem 8.1ACQ

Summary Introduction

To discuss: The relevant cash flows used to value a share of common stock

Introduction:

Common stock is a security in which the investor (shareholder) invests their money in the corporation as owner’s 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.

As a result, the companies will pay off their common stock dividends inconsistently and sometimes would not pay dividends to their respective investors at all.