Suppose a Stock Is Not Currently Paying Dividends,and Its Management

question 71

Multiple Choice

Suppose a stock is not currently paying dividends,and its management has announced that it will not pay a dividend for at least 5 years,but that it does expect to start paying dividends sometime in the future.Under these conditions,which of the following statements is correct?

• A) Since it is expected to someday pay dividends,the value of the stock today can be found with this equation: P₀ = /(r − g).
• B) The value of the stock cannot be found,even theoretically,by finding the present value of expected future dividends.
• C) According to the text,such a stock should have a value of zero.Any actual value could only come from bids by people who want to control the company in order to draw salaries.
• D) The value of the stock could be found by DCF procedures,but we would have to insert zeros for until such time as we expect the company to begin paying dividends.

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Definitions:

Rights Offering

A method by which a company raises capital by giving its existing shareholders the right to purchase additional shares directly from the company at a specified price within a set time.

Record Date

The specified date on which a company determines the shareholders eligible to receive a dividend or distribution.

Ex-rights Date

The ex-rights date is the first trading day when the buyer of a stock is not entitled to receive a previously declared rights offering, often leading to a decrease in the stock's price.