ch 8 stock valuation Flashcards
1
Q
constant dividend
A
the firm will pay a constant dividend forever
- like a preferred stock
- the price is computed using the perpetuity formula
Dt = D0 x (1+g)^t
2
Q
constant dividend growth
A
the firm will increase the dividend by a constant percent every period
Pt = Dt+1/r-g
3
Q
supernormal growth
A
dividend growth is not consistent initially, but settles down to constant growth eventually
3
Q
rights of shareholders
A
- the right to share proportionally in dividends paid
- the right to share proportionally in assets remaining after liabilities have been paid in a liquidation
- the right to vote on shareholder matter of great importance, such as a merger, usually done at the annual meeting or a special meeting
4
Q
characteristics of dividends
A
- unless a dividend is declared by the board of directors of a corporation, it is not a liability of the corporation
- the payment of dividends by the corporation is not a business expense. dividends are not deductible for corporate tax purposes
- dividends received by individual shareholders are partially sheltered by a dividend tax credit. this avoids double taxation of dividends
5
Q
classes of stock
A
- unequal voting rights
- control of firm
- coattail provision
6
Q
common stock
A
stock that has no special preference either in dividends or in bankruptcy
7
Q
preferred stock
A
has preference over common stock in the payment of dividends and in the distribution of corporate assets in the event of liquidation
