. Based on the Dividend Model, would an increase In the growth rate of dividends

Question

. Based on the Dividend Model, would an increase In the growth rate of dividends cause a stock's price to increase or decrease? . What is set equal to zero for the Dividend Model to be used to value preferred stock? . What does the corporate valuation model assume Is found by discounting all future free cash flow back to the present? . What is the assumed pattern of cash flow benefits with preferred stock? . In the corporate valuation model, what s typically the Item that represents non- operating assets?

Explanation / Answer

1. Based on dividend model , an increase in dividend growth rate will lead to an increase in the stock price as the numerator will increase and denominator decrease with increase in dividend growth in the equation Price = Dividend (1+Growth )/ (cost of equity-didiend growth rate)

2. The growth rate in dividend is set to zero for using the dividend model for preferred stock valuation.

3. The corporate valuation model assumes that the discounting all the futture cash flows to present value, we can get the current value of the opeartion or business.

4. Preferred stock has a fixed dividend model and the cash flow will be same in every profit making year. If we dscount the future cash flows , the PV of the cash flows will have a continuously decreasing value.

5. Non operating assets in corporatopn valuation model are those assets which generate income but those are not part of the core business of the company. For example , excess cash deposit in bank , investments in shares and bonds that generate dividend and interest income, any real estate generaing rental income having no relation to normal business etc etc.

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