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Unformatted text preview: kp kp = $5 / $50 = 0.10 = 10% Limitations of the Dividend
Limitations of the Dividend
Discount Model NonDividendPaying Stocks Many companies do not pay dividends, thus the dividenddiscount model must be modified. Share Repurchases The firm uses excess cash to buy back its own stock Consequences: The more cash the firm uses to repurchase shares, the less cash it has available to pay dividends By repurchasing shares, the firm decreases its share count, which increases its earnings and dividends on a Warning Signs
Warning Signs Source: http://www.investopedia.com/video/ Bonus: Alternative 1 – Total Payout Model Share Repurchases P0 = PV ( Future Dividends per Share ) In the dividenddiscount model, a share is valued from the perspective of a single shareholder, discounting the dividends the shareholder will receive: Total Payout Model Values all of the firm’s equity, rather than a single share To use this model, discount the total payouts that the firm PV ( Future Total Dividends and Repurchas...
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This document was uploaded on 01/14/2014.
- Winter '14