RWJ7

MKTG (with Marketing CourseMate with eBook Printed Access Card)

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CHAPTER 7 EQUITY MARKETS AND STOCK VALUATION Answers to Concepts Review and Critical Thinking Questions1. The value of any investment depends on 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 anothercompany). 3. In general, companies that need the cash will often forgo dividends since dividends are a cashexpense. 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 laterchapter. 4. The general method for valuing a share of stock is to find the present value of all expected futuredividends. The dividend growth model presented in the text is only valid (i) if dividends areexpected to occur forever; that is, the stock provides dividends in perpetuity, and (ii) if a constantgrowth rate of dividends occurs forever. A violation of the
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RWJ7 - CHAPTER 7 EQUITY MARKETS AND STOCK VALUATION Answers...

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