Why might an investor-owned firm choose to issue different classes of common stock?
What are the similarities and differences between equity capital in investor-owned firms and fund capital in not-for-profit firms?
Two investors are evaluating the stock in Beverly Enterprises for possible purchase. They agree on the stock’s risk and on expectations about future dividends. However, one investor plans to hold the stock for five years, while the other plans to hold the stock for 20 years. Which of the two investors would be willing to pay more for the stock? Explain your answer.
a. What is meant by risk/return trade-off?
b. Does this trade-off hold in all markets?
Do the following problems from pages 442-443:
(8 points each)
A person is considering buying the stock of two home health companies that are similar in all aspects except the proportion of earnings paid out as dividends. Both companies are expected to earn $6 per share in the coming year, but Company D (for dividends) is expected to pay out the entire amount as dividends, while Company G (for growth) is expected to pay out only one-third of its earnings, or $2 per share. The companies are equally risky, and their required rate of return is15 percent. D’s constant growth rate is zero and G’s is 8.33 percent. What are the intrinsic values of stocks D and G?
A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of $2 per share. The dividend is expected to grow at a constant rate of 5 percent per year. The stock’s required rate of return is 12 percent.
a. What is the expected dollar dividend over the next three years?
b. What is the current value of stock and the expected stock price at the end of each of the next three years?
c. What is the expected dividend yield and capital gains yield for each of the next three year?
d. What is the expected total return for each of the next three years?
e. How does the expected total return compare with the required rate of return on the stock? Does this make sense? Explain your answer.
Better Life Nursing Home, Inc., has maintained a dividend payment of $4 per share for many years. The same dollar dividend is expected to be paid in future years. If investors require a 12 percent rate of return on investments of similar risk, determine the value of the company’s stock.
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An investor-owned firm may issue a dividend paying class of stock to provide the public an opportunity to invest its company without sacrificing income, while having a second class of stock that allows the owners to maintain control of the company. This type of stock would be known as founders stock....