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    capital budgeting technique

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    1. As of December 1999, Amazon.com had never paid a dividend and the market value of its stock was $37 billion. Does this invalidate the dividend discount model? Why or why not?

    2. Which capital budgeting technique is consistent with maximizing shareholder wealth and why?

    3. WACC is also referred to by 3 other names. What are they?

    4. Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term bonds?

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    As of December 1999, Amazon.com had never paid a dividend and the market value of its stock was $37 billion. Does this invalidate the dividend discount model? Why or why not?

    No, that does not invalidate the Dividend Discount Model. What the Dividend Discount Model tells us is that the current share price equals the value of next year dividend (or earnings) divided by the required rate of return minus the growth rate; so even when the company does not pay dividends, the current price per share could still be calculated using the Dividend Discount Model.

    2.Which capital budgeting technique is consistent with maximizing shareholder wealth and why?

    The Net Present Value analysis is the most consistent with maximizing shareholders' wealth. This is because the NPV decision rule states that we should accept the project ...

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