1. CHAPTER 9 VALUATION OF COMMON STOCKS

2. The Discounted Dividend Model (DDM) is defined as any model that computes the value of a share of stock as the present value of its expected future cash dividends.. – Now, suppose ROE = k, or the return on equity equals the risk-adjusted cost of capital.

3. Problem 1

4. Problem 2

5. P 0 = 11.17

6. Answer to Problem 12

7. Stock Dividends

9. Stock Splits

11. Answer to Problem 11 In 1961, Modigliani and Miller presented an argument to prove that in a frictionless financial environment, in which there are no taxes and no costs of issuing new shares of stock or repurchasing existing shares, a firm’s dividend policy can have no effect on the wealth of its current shareholders. Issues of taxes on dividends paid out, laws preventing share repurchase as a regular alternative to cash dividends, investment bankers’ fees for arranging external financing, etc., all make dividend policy relevant.