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A common stock will distribute a $5 cash dividend next year. Following that, an endless 1% annual growth in dividends is anticipated. The present value of the stream of dividend payments, at a discount rate of 12%, is $71.43.
Cash dividend minus present value (Discount rate - Growth rate)
The present value is $5. (0.11 - 0.04)
present value = $71.43
Common stock is a type of security that denotes ownership in a company. The board of directors and corporate policies are chosen by common stockholders. Long term, this type of stock ownership often produces higher rates of return. But in the event of liquidation, common shareholders are only entitled to the assets of the company once bondholders, preferred shareholders, and other debt holders have been fully compensated.
Common stock serves as a residual claim to current and future profits of a corporation. Shareholders are therefore referred to as a company's partial owners. This does not imply that stockholders can enter a company's offices and assert ownership of some of the chairs, desks, or computers. These items are the property of the corporation, a legitimate entity, which is wholly owned by it. This residual claim, however, is owned by the stockholders. On exchanges, common stock is exchanged, and investors and dealers can buy and sell it. Dividends could be available to common stock holders.
Learn more about common stock here
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