he value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of two elements: (1) the dividends the investor receives each year while he or she holds the stock and (2) the price received when the stock is sold. The final price includes the original price paid plus an expected capital gain. True or false

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Business

Cailyn Munoz

15 September, 19:17

he value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of two elements: (1) the dividends the investor receives each year while he or she holds the stock and (2) the price received when the stock is sold. The final price includes the original price paid plus an expected capital gain. True or false

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Joanna Morse · Answer 1

TRUE

Explanation:

Using the Gordon Growth Model, we can adequately demonstrate that the dividend and price of a share are both components of the cashflow to be considered in share valuation.

Price per share is found to be D (1) / (r - g)

where:

Do = Dividend now

D1 = Dividend in year 1

g = growth

r = required return

So we see that the market price of a share which determines the market capitalization of a company is predicted by a growth in dividends. So the benefits of holding a share will not only depend on how much the share is sold now as against how much it can be sold in the future (in order to make a gain), but also how much you can be earning until such sale occurs.