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FIN622 - Corporate Finance Graded Discussion Board (GDB) No 1 

Total Marks 5
Starting Date Tuesday, May 02, 2017
Closing Date Monday, May 08, 2017
Status Open
Question Title GDB # 01
Question Description

Topic for Discussion: “Common Stock Valuation”

Learning objective:

To make the students learn the impact of components of dividend discount model on current share price of a company.

Learning outcome:

After attempting this activity, students will be able to differentiate and identify the impact of components of Dividend Discount Model in determining the current share price of a company.

Question:

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.

Requirement:

Considering the components of Dividend Discount Model (DDM), discuss how plowing back some portion of earnings into business can:

  1. Increase the current stock price.
  2. Decrease the current stock price.
  3.  Have No effect on current stock price.

Special Note:

  • Your answer should be to the point and must satisfy the question requirement.
  • Copied answer or same content with only synonyms changed from any source of internet will straight away be marked zero.

Note:

For acquiring the relevant knowledge watch the course video lectures, consult recommended books, and study additional material available online or in any other mode.

Important Instructions:

  • Your discussion must be based on logical facts.
  • The GDB will open and close on above specified date and time. Please note that no grace day or extra time will be given for posting comments on GDB.
  • Use the font style “Times New Roman” and font size “12”.
  • Your answer should be relevant to the topic i.e. clear and concise.
  • Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
  • Books, websites and other reading material may be consulted before posting your comments; but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references.
  • You should post your answer on the Graded Discussion Board (GDB), not on the Moderated Discussion Board (MDB). Both will run parallel to each other during the time specified above. Therefore, due care will be needed.
  • Obnoxious or ignoble answer should be strictly avoided.
  • You cannot participate in the discussion after the due date via email.
  • Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.
  • For planning your semester activities in an organized manner, you are advised to view schedule of upcoming Assignments and GDBs in the overview tab of the course website on VU-LMS.

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