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1) Which of the following statements about shares is correct, all other things being equal? Select one: a
1)
Which of the following statements about shares is correct, all other things being equal?
Select one:
a. Dividends to ordinary shareholders are contractual obligations.
b. A lower required rate of return implies a lower share value.
c. Dividends to preference shareholders are contractual obligations.
d. A higher dividend growth rate implies a higher share price.
2)
An investment has an installed cost of $50,327. The cash flows over the four-year life of the investment are projected to be $23,733, $20,863, $21,087, and $18,020.
If the discount rate is zero, what is the NPV?
Expert Solution
1)
Higher the Growth Rate, higher will be the value of stock and vice- versa.
P0=D1/(r-g)
Here,
P0 = Current Price of Stock
D1 = Dividend for Next Year
r = Required Rate of Return
g = Growth Rate
Higher growth rate will make the denominator low. Lower denominator will make the value of stock higher.
The correct option is D "A higher dividend growth rate implies a higher share price".
2)
Computation of NPV:
NPV = Present Value of Cash Inflows - Initial Investment
Here,
Present Value of Cash Inflows = $23,733 + $20,863 + $21,087 + $18,020 = $83,703
Initial Investment = $50,327
NPV = $83,703 - $50,327 = $33,376
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