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.

Question

Quizplus · Accepted Answer

The best choice is D because it states that the value of the stock could be found by DCF (discounted cash flow) procedures, but only by inserting zeros for expected future dividends until the company begins to pay dividends. Option A is incorrect because it assumes a known growth rate, whereas the question only provides information on when dividends will begin. Option B is incorrect because the present value of future dividends is a common method of valuing stocks. Option C is incorrect because stocks without dividends can still have value based on the company's assets, earnings potential, and other factors.

Suppose a Stock Is Not Currently Paying Dividends,and Its Management