BUSN 379 Stock Valuation

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BUSN 379 Stock Valuation
Are there any instances in which companies should not pay dividends?  How do dividends impact the value of a share…

 

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BUSN 379 Stock Valuation

BUSN 379 Stock Valuation

Discussions Week 3 All Students Posts 21 Pages 

Are there any instances in which companies should not pay dividends?  How do dividends impact the value of a share of stock?  How can you relate the concept of time value of money learned in Week 2 to stock valuation?

The dividend growth model can be applied when dividend growth is constant (or constantly zero). However, most companies do not increase dividends at the same rate forever. For example, a company is not likely to increase dividends at 5% for the next 20 years. It would probably increase it by 5, then 3, then 4 and so forth. There will be change. What does this tell us about the model?
Even with these considerations, the basic way to price a stock is with the dividend growth model. The formula is R=D1/P0 + g. Remember that preferred stock does not have growth so the “g” is zero. As we discuss this model, consider the following questions:
1. Assume you buy stock from Company X. The next dividend (the dividend D1 one year from now) is $5. You expect the stock to grow at a rate of 3% indefinitely and the return you required from this stock is 6%. What is the price of the stock today?
2. If you increase the dividend to $6, what happens to the stock price?
3. If you increase the rate of return required to 8%, what happens to the stock price?
4. What would the price of the stock be if this were to be preferred (instead of common stock)?…