Question

Part 1: Discuss the benefits and issues related to stock ownership as an investment type. What are the issues related to equity as a source of additional funds, and valuation concepts?

Part 2: Stock ABC is expected to pay dividends of $1.20 and $1.50, respectively in one and two years. After that, ABC is entering a constant growth stage, after which ABC is expected to grow with the constant growth rate of 4%. If the required rate of return on ABC is 12% what is the price of ABC? Explain fully! Show your work! Initial response 250-300 words

Answer 1

Part A

Benefits of stock ownership as investment type :

1. Investment Gains from the Share
2. Dividend Income from the Stock
3. Diversification to another type of investment
4. Ownership Stake in the Company
5. Maximum Returns on the investment:
6. Investing in shares are the best way to stay ahead of inflation
7. Stock Ownership takes advantage of Growing Ownership

Issues of owning stocks as a investment types.

1. Risk : You could lose your entire investment. If a company does poorly.
2. Stockholders paid last: Preferred stockholders and bondholders/creditors get paid first if a company goes broke but this happen only in case of company bankruptcy.
3. Time: If buying stocks on your own, you must research each company to determine how profitable you think it will be before you buy its stock. You must learn how to read financial statements and annual reports and follow your company's developments in the news. You also have to monitor the stock market itself, as even the best company's price will fall in a market correction, a market crash, or bear market.
4. Emotional roller coaster: Stock prices rise and fall second-by-second. Individuals tend to buy high, out of greed, and sell low, out of fear.
5. Professional competition: Institutional investors and professional traders have more time and knowledge to invest.

Part B