Ch 8

Question 0

Dividends

Answer 0

Dt = Do (1+g)^t

1) unless a div is declared by directors, it is not a liability
2) divs are not a business expense. not tax deductible. Divs are paid out of after-tax profits
3) divs paid to individuals are partially sheltered by a tax credit
4) divs paid to corp are non-taxable for receiving corp

Question 1

Dividend yield

Answer 1

D1/Po

Question 2

Capital gains yield

Answer 2

Dividend growth rate or the rate at which the value of an investment grows

g = (P1 - Po) / Po

Question 3

Shareholders rights

Answer 3

1) share of dividends paid
2) share of assets after liabilities have been paid in a liquidation
3) right to vote and elect directors

Preemptive right - firm must sell shares to existing shareholders before the general public

Question 4

Coattail provision

Answer 4

Allows nonvoting shareholders certain rights such as conversion to voting shares or the right to vote in the event of a takeover bid

Question 5

Preferred Stock

Answer 5

1) Priority over common stock in divs and liquidation
2) par/liquidation/stated value that reflects initial contribution to capital when share was sold
3) usually fixed cumulative dividend
4) no voting rights

Question 6

Stock price relationships

Answer 6

Stocks with high growth rates have an appreciable cap gains yield but relatively small div yield

Stocks with a negative growth rate have high div yield but price depreciates over time. (Negative cap gains yield)