|GDB # 01||Dated: Apr 28, 17|
Graded Discussion Board
Corporate Finance (FIN622)
This is to inform that Graded Discussion Board (GDB) will be opened on May 2nd, 2017 for discussion and last date for posting your discussion will be May 8th, 2017.
Topic/Area for Discussion
“Common Stock Valuation”
This Graded Discussion Board will cover concepts discussed in lecture # 1 to 7.
Dividend discount model is a widely used common stock valuation technique suitable for stocks of companies paying all or some of their earnings in the form of dividends to their shareholders.
Firms which pay all their earnings in the form of dividends have zero growth rate (g=0) since they have nothing to reinvest from their earnings in profitable opportunities. It is argued in relevant empirical studies that such firms which pay all their earnings as dividends have less current stock value as compared to those that retain some portion of their earnings to plowback in business. This is because retained earnings are then reinvested in business in available profitable opportunities to earn an expected return that ultimately increase current stock price. The return expected on retained earnings is different from the rate of return required by investors (r). This expected return on plow back (retained) earnings is then multiplied with the retention ratio of companies to determine their growth rate. In real situation, the relationship between retained earnings to reinvest in business and current stock price is bit complex. Retaining some portion of earnings to reinvest in business can have positive, negative or no effect on current stock price of a firm.
Considering the components of Dividend Discount Model (DDM), discuss how plowing back some portion of earnings into business can:
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we need to explain the effect of plowing back earnings on current stock price. We are required to answer when it will increase, decrease and have no effect on stock price.
anyone have any idea ?????