Question

n the calculation of price of a common stock, future stock dividends are _______ and discount rates for the stock are ______.

a.) guaranteed; not guaranteed

b.) not guaranteed; not guaranteed

c.) not guaranteed; guaranteed

d.) guaranteed; guaranteed

Answer 1

In my knowledge the dividend payable is not guaranteed and similarly the rate of discount. Therefore, Option (B) is correct.

There are numerous factors affecting the dividend and discounting rate of the stock. Some are: -

· Need of Liquidity: - There are several short term expenses which are incurred by the company on the regular basis. Therefore, the company finds a feasible option of retaining the maximum earnings.

· Maintenance of control in ownership: - There should be maximum retention of the earnings if the shareholders want to exercise the control in the organization.

· Floating Cost: - If the cost is higher than there would be maximum retention of earnings while in reverse situation there will be payment of dividend.

· Consideration of Tax: - If the rate on capital gain is higher than the company would prefer of distribute dividends while if the tax on dividend is higher than the retention of earning would be encouraged.