Question

please answe 1,3 and 11

not answers in pictures please

REVIEW AND CRITICAL THINKING QUESTIONS 1. Stock Valuation (L01] Why does the value of a share of stock depend on dividends 2. Stock Valuation [L01] A substantial percentage of the companies listed on the NYSE and NASDAQ don't pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given your answer to the previous question 3. Dividend Policy [L01] Referring to the previous questions, under what circum stances might a company choose not to pay dividends? Dividend Growth Model (L01 Under what two assumptions can we us idend growth model presented in the chapter to determine the value 4. Die stock? Comment on the reasonableness of these assumptions. is can we use the div- e the value of a share of

Answer 1

1. Dividend payments are the primary method companies share their profits with stockholders. Numerous investors rely on dividends for their living expenses and construct a stock portfolio primarily to maximize their dividend income. Dividend payments increase demand for a stock and consequently result in a higher stock price.

An Investor who invests in Stock for regular income in the form of dividends, would want that the company he/she is investing in pays steady dividends each year. The preference to regular income affects the stock price, hence the stock price of a company which pays steady dividends each year, is greatly affected if it chose not to pay dividends in a particular year.

3. A company that is still growing rapidly usually would not pay dividends because it wants to invest as much as possible into further growth.

Also mature firms that believe they can increase value by reinvesting their earnings will choose not to pay dividends. The Investor of these mature firms do not expect from the company to pay dividends and therefore the share price of these companies does not get affected by dividend payments.

11. The statement speaks for itself. Managers tend to focus more on short term profitability to boost the share price and in turn their incentives. This compromises their vision for long term growth and sustainability. The Stock markets are run by various factors including demand and supply. Thus short term share prices should not dictate the working style of managers.