Karim as an investor is considering purchasing the stocks of two companies (F & D) that operate in the same industry. They have very similar characteristics except for their dividend payout policies. Both companies are expected to earn $3 per share this year; but Company D (for “dividend”) is expected to pay out all of its earnings as dividends, while Company “F” (for “growth”) is expected to pay out only one-third of its earnings, or $1 per share. D’s stock price is $25. F and D are equally risky.
6. Which of the following statements is least likely to be true? *
A) Company F will have a faster growth rate than Company D. Therefore, F’s stock price should be greater than $25.
B) Although F’s growth rate should exceed D’s, D’s current dividend exceeds that of F which should cause D’s price to exceed F’s.
C) A long-term investor in Stock D will get his or her money back faster because D pays out more of its earnings as dividends. Thus, in a sense, D is like a short-term bond and F is like a long-term bond. Therefore, if economic shifts cause rd and rs to increase and if the expected dividend streams from D and F remain constant, both Stocks D and F will decline, but D’s price should decline further.
D) All of the above.
E) None of the above.