Question

. Is it possible for the estimated value of a common stock to decline if sales...

. Is it possible for the estimated value of a common stock to decline if sales growth is increasing but the

      operating profitability ratio and the capital requirements ratio both remain the same?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Yes, it is possible. Because the estimated value of the stock depends not just on the profitability,sales and capital requirement factors It also depends on the dividend payouts and the future earnings and dividends grwoth.

The value of the stock is calculated by formula=Dividend in next year/(cost of equity capital-growth rate of dividends)

Out of the earnings a comapny make, how is paid to the shareholders and how is retained by the company for the future growth.

If the growth rate is high, the denominator becomes less and numarator becomes high which results in increase in the estimated stock price. If growth rate is low, estimated stock price decreases assuming the profitability and cpital requirement remains same

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The value of any stock estimated by the dividend growth model depends on both the dividend...
The value of any stock estimated by the dividend growth model depends on both the dividend stream and any expected capital gains. True False
10-5 Two investors are evaluating IBM’s stock for possible purchase. They agree on the expected value...
10-5 Two investors are evaluating IBM’s stock for possible purchase. They agree on the expected value of D1 and on the expected future dividend growth rate. They also agree on the riskiness of the stock. One investor normally holds stocks for two years, and the other normally holds stocks for 10 years. On the basis of the type of analysis presented in this chapter, they should both be willing to pay the same price for IBM’s stock. Is this statement...
The value of a share of common stock depends on the cash flows it is expected...
The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital gain. The actions of the marginal investor determine the equilibrium stock price. Market equilibrium occurs when the stock's price is -Select-less thanequal togreater...
Preferred stock is similar to common stock in the following way; a. both preferred stock and...
Preferred stock is similar to common stock in the following way; a. both preferred stock and common stock provide equal periodic dividends. b. both investments have a final maturity value set by the issuing agreement. c. both contain a dividend growth factor. d. as equity, both are subordinate to bondholders in the event of bankruptcy.
Suppose you are estimating a growth rate of FCF within the corporate value model. You noticed...
Suppose you are estimating a growth rate of FCF within the corporate value model. You noticed that the firms FCF has been declining in the past three years while its NOPAT and operating capital have been steadily increasing over the same time period. 1) What could be the reason for the decline in FCFs, and 2) what can you say, in general, about the future FCF growth rate?
Preferred stock— $25 par value, 10,000 shares authorized, 5,200 shares issued and outstanding $ 130,000 Common...
Preferred stock— $25 par value, 10,000 shares authorized, 5,200 shares issued and outstanding $ 130,000 Common stock—$10 par value, 100,000 shares authorized, 80,000 shares issued and outstanding 800,000 Total paid-in capital $ 930,000 Retained earnings 550,000 Total stockholders’ equity $ 1,480,000 The number of issued and outstanding shares of both preferred and common stock have been the same for the last two years. Dividends on preferred stock are 8 percent of par value and have been paid each year the...
An article in the Gotham Times states that the stock of capital and the workforce in...
An article in the Gotham Times states that the stock of capital and the workforce in Gotham are both increasing at an annual rate of 5 percent. The same article states that real output is growing by 10 percent. This is possible in the long run because the economy is experiencing an increase in​ ____________. A. productivity growth. B. government spending. C. demand for goods and services. D. all of the above. This is possible in the short run because​...
You are looking to value some common stock using various valuation models and are answering the...
You are looking to value some common stock using various valuation models and are answering the following questions: 8. T/F a high PE ratio is not really justified if the growth rate of the company is below the industry average 9. T/F a company with a high growth rate will cause most valuation models to yield a higher stock price intrinsic value. 10. T/F the lower the required return should cause an investor to pay less for a stock.
Ratio Industry Average Return on total assets 1.00 Book value per common share 10.00 Days' sales...
Ratio Industry Average Return on total assets 1.00 Book value per common share 10.00 Days' sales in inventory 300.00 Return on shareholders' equity 20.00 Times interest earned ratio 1.00 Questions: a. Explain why it would be favourable and unfavourable if an actual company had ratio values that were higher or also lower than the listed Ratio Industry averages. b. Categorize each Ratio as either a: Liquidity ratio, Coverage ratio, Activity ratio, or Profitability ratio.
The market value of Exxon Corporation's common stock is $40 million and the market value of...
The market value of Exxon Corporation's common stock is $40 million and the market value of its risk-free debt is $60 million. The firm's stock is currently trading at $32 and has just paid a dividend of $4.0 per share which is expected to growth at 3% forever. If the Treasury bill rate is 6 percent, what is the firm's cost of capital? (Assume no taxes.) a. 9.95 b 15.50 c 7.46. d 13
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT