Concept explainers
Stock Valuation Why does the value of a share of stock depend on dividends?
To determine: Whether the share value of a stock depends on the dividend.
Stock Valuation:
Stock valuation is a kind of valuation exercise of stock. In this, the value of stock is calculated theoretically and the value of firm is determined. With the help of stock valuation technique, a company can predict the future value of stock prices.
Explanation of Solution
An investor invests in a company to receive a good return in future. The value of any investment totally depends on the return, basically on the present value of the cash flows. The return on investment for the share of a stock is the dividend amount. Therefore, the value of share of the stock depends on the dividend.
Here, the stock value is the present value of cash flows and the dividend is inflow, which makes the stock value dependent on dividend value. On paying the dividends promptly, the investors’ confidence improvises. This in turn increases the stock’s demand and thereby also increases the stock prices.
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Chapter 9 Solutions
EBK CORPORATE FINANCE
- Explain the theory behind the dividends-based valuation approach. Why are dividends value-relevant to common equity shareholders?arrow_forwardWhich of the following are not part of common equity? a. preferred stock c. retained earnings b. common stock d. treasury stockarrow_forwardWho actually owns stock, how is the price of common stock based and how is the price of bonds valued?arrow_forward
- What is a stock dividend? How does a common stock dividend distributed to common stockholders affect their respective ownership interests?arrow_forwardWhy is the ex-dividend date important to stockholders? If a stock is sold on the ex–dividend date, who receives the dividend—the buyer or the seller?arrow_forwardHow does the purchase of treasury stock affect the purchaser’s assets and total equity?arrow_forward
- What is the difference between the accounting for a small stock dividend and the accounting for a large stock dividend?arrow_forwardWhat is most likely to happen to the earnings per share and market price of a certain stock when a firm issues stock dividends?arrow_forwardDiscuss why stock dividend and stock split are not real dividend issues.arrow_forward
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