Please help me with these questions. a) Companies may not pay dividends all the

Question

Please help me with these questions.

a) Companies may not pay dividends all the times. What could be possible reasons for a company not to give dividends to its shareholders?

b) In the book, we talk about Constant Dividend Model and Constant Growth Dividend Model. "If the growth in the latter model becomes zero, then the model becomes Constant Dividend Model." Do you agree with the statement or not?

c) If a company is not paying any dividend, then how you can evaluate the true value of the stock of the company.

d) Company AAA Inc. has preferred stocks and stocks,bonds, debentures, and callable bonds. Which of these instrument is least risky? which one is most risky? Order these securities in terms of riskiness.

Explanation / Answer

A. Possible reasons for a company not to give dividends
- A company doesn't have sufficient profits yo pay dividend
- A company is planning for expansion
- A company requires the cash to Buy-back the shares
- A company requires the cash to redeem Debentures or Preferred Stock

B. Yes, we agree with the given statement. In Constant Dividend Model, afixed dividend is paid every year and in Constant Growth Dividend Model Divedend is increase every year by the same growth rate. If growth rate would be zero this means that the same is dividend is being paid every year. Thus. Constant Growth Dividend Model becomes Constant Dividend Model.

C. If a company is not paying the stock the true value of the stock can be evaluated by the EPS model. This means DPS will be replace by EPS.

D. Bonds and Debentures are least risky and Stock is most risky. Order from least to most risky is as follows:
1. Bonds and Debentures
2. Callable Bonds
3. Preferred Stock
4. Stock

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