The value of common stock depends on the
A. price of the stock.
B. retirement date.
C. present value of cash flows.
D. coupon rate.
I need help with this one
one of the books I read it says "Value of common stock depends on present value of expected future cash flows." so I would assume the anwer is C
There are several ways of valuing stock, C is one of them.
To a "value" stock investor who follows the teachings of Benjamin Graham, the answer is (c), but in most industries, no one can be sure of future cash flows. So you need to be a good fortune teller and judge of the character of management. That is what Warren Buffett has done so well. Until now.
See
http://www.investopedia.com/terms/v/valueinvesting.asp
What a stock is "worth" at a given time is of course what the market will pay for it.
To determine the value of common stock, you need to consider various factors. Let's break down the options to understand which one affects the value of common stock:
A. Price of the stock: While the price of the stock may fluctuate in the market, it doesn't directly impact the intrinsic value of the stock.
B. Retirement date: The retirement date is not relevant to the value of common stock. This answer choice can be eliminated.
C. Present value of cash flows: This option is correct. The value of common stock is ultimately derived from the present value of the expected future cash flows it will generate. Investors typically estimate the cash flows the company will generate in the future and discount them back to the present value using an appropriate discount rate. This helps determine the intrinsic value of the stock.
D. Coupon rate: The coupon rate is primarily associated with bonds, not common stock. It represents the interest payment made by a bond issuer to the bondholder. Therefore, this option is not relevant to the value of common stock.
Based on the explanations above, the correct answer is C. The value of common stock depends on the present value of cash flows.