[Anonymous]

It seems that this part of the lesson went over my head. There was a question that says, “The Market value of a firm’s outstanding common shares will be higher, everything else equal, if…”

And the correct choice is “Investors have a lower required rate on equity.” The explanation give says, “investors value common shares more highly if they have a lower required return because then they apply a lower discount rate to the expected future dividend stream of the company.” So a lower required return leads to a lower discount rate (okay, I understand that), which then leads to higher value of common shares?

[acamp]

I think the Dividend Discount Model would apply here. Basically, one way to put a price on a stock is to discount the future cash flows (from dividends), if your discount factor (required rate of return) drops, the present value of the discounted dividends (and the stock price) goes up

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[acamp]

I think the Dividend Discount Model would apply here. Basically, one way to put a price on a stock is to discount the future cash flows (from dividends), if your discount factor (required rate of return) drops, the present value of the discounted dividends (and the stock price) goes up

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[Whopper Warrior]

Key Word is Market Value…

Secondly I agree with Acamp but lets put some numbers to it.

Constant co pays a dividend of 2$ and it will remain that way indefinetly. Investors demand a market return of 10% before investing.

P0 = D1 / (r – g)

remeber d1 = d0 * (1 + g), for simplicity I made the dividend growth rate 0 so D0 = D1, this is not always true.

P0 = 2 / (.1 – 0)

P0 = $20

Due to some bs reason investors now demand 5% return instead of 10%.

P0 = 2 / .05

P0 = $40

Again this is a very basic and reflects MARKET pricing, not internal. If you were to sit back and think about it very high level the more you pay (20 vs 40) the lower your return (10 vs 5).

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Whopper Warrior]

Key Word is Market Value…

Secondly I agree with Acamp but lets put some numbers to it.

Constant co pays a dividend of 2$ and it will remain that way indefinetly. Investors demand a market return of 10% before investing.

P0 = D1 / (r – g)

remeber d1 = d0 * (1 + g), for simplicity I made the dividend growth rate 0 so D0 = D1, this is not always true.

P0 = 2 / (.1 – 0)

P0 = $20

Due to some bs reason investors now demand 5% return instead of 10%.

P0 = 2 / .05

P0 = $40

Again this is a very basic and reflects MARKET pricing, not internal. If you were to sit back and think about it very high level the more you pay (20 vs 40) the lower your return (10 vs 5).

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Anonymous]

Thanks Whopper Warrior! Now after seeing the formula, it makes sense that a higher required rate would result in a lower price per share.

[Anonymous]

Thanks Whopper Warrior! Now after seeing the formula, it makes sense that a higher required rate would result in a lower price per share.

[Author]

Replies