CHAPTER 8-Answers to Concepts Review and Critical Thinking Questions

CHAPTER 8-Answers to Concepts Review and Critical Thinking Questions

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CHAPTER 8 STOCK VALUATION Answers to Concepts Review and Critical Thinking Questions 1. The value of any investment depends on the present value of its cash flows; i.e., what investors will actually receive. The cash flows from a share of stock are the dividends. 2. Investors believe the company will eventually start paying dividends (or be sold to another company). 3. In general, companies that need the cash will often forgo dividends since dividends are a cash expense. Young, growing companies with profitable investment opportunities are one example; another example is a company in financial distress. This question is examined in depth in a later chapter. 4. The general method for valuing a share of stock is to find the present value of all expected future dividends. The dividend growth model presented in the text is only valid (i) if dividends are expected to occur forever, that is, the stock provides dividends in perpetuity, and (ii) if a constant growth rate of dividends occurs forever. A violation of the first
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CHAPTER 8-Answers to Concepts Review and Critical Thinking Questions

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