Suppose a Stock Is Not Currently Paying Dividends, and Its

question 7

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:

Ideal Levels

Optimal quantities or conditions that ensure the best performance, efficiency, or yield in various contexts such as inventory, production, and staffing.

Product Cost Concept

An accounting principle that incorporates all costs associated with the production of goods, including material, labor, and overhead.

Selling Expenses

Costs incurred directly in the selling of goods or services, including advertising, sales commissions, and promotional materials.

Markup

The difference between the cost of a good or service and its selling price, expressed as a percentage of the cost.