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:

Insulin

A pancreas-derived hormone that assists in controlling blood glucose levels by facilitating the entry of glucose into the body's tissues.

Glucose

A simple sugar that is an important source of energy and is involved in many metabolic processes.

Nitrogenous Waste

Waste products that contain nitrogen, typically produced by the metabolic processing of proteins and nucleic acids, and excreted in the form of urea, ammonia, uric acid, or creatinine.

Ion Balance

The maintenance of proper concentration of ions inside and outside the cell, crucial for various physiological processes including nerve impulse transmission and muscle contraction.